The quarterly ritual of Fannie Mae and Freddie Mac asking for bailout money is upon us again. This time around Fannie Mae is asking for $5.1 billion to cover its losses. That is lower than last quarter's $8.7 billion bailout need, but it pushes Fannie over the $100 billion bailout threshold for the first time. Debate cohorts in housing finance crime Freddie Mac also saw losses for the second quarter of 2011, and asked for a $1.5 billion bailout from Treasury earlier today. Naturally, the government granted these requests since Secretary Geithner has promised to cover any and all losses for the GSEs.
Despite that promise, made on Christmas Eve 2009 and maintained since, S&P downgraded Fannie Mae and Freddie Mac earlier today. On the heals of the federal government getting downgraded from AAA to AA+, S&P bumped Federal Home Loan Banks, 30 insurance companies, and a host of other affiliated organizations down a notch. It isn't clear that fundamentals at the GSEs have changed in the past few weeks, but the downgrade of the mortgage giants could have some serious consequences for their future.
Even though Fannie and Freddie suffer more losses each quarter than they handle and stay solvent (because of the bailouts), they have enjoyed a AAA credit rating during the whole time of their conservatorship. One might argue that they should have been downgraded a while ago, but with the full faith and credit of the United States behind them that logic didn't stick. One reason this downgrade matters though is that it shows how dependent the GSEs are on the U.S. taxpayer in a new way. Another reason is that the downgrade could raise borrowing costs for Fannie and Freddie—and thus increase mortgage rates. They could also see higher collateral requirements as a result of the downgrade, restricting some of their business activities with a constrained balance sheet (not that this would be a bad thing).
So far the GSE bailout looks like this:
- Fannie Mae: $103.8 billion
- Freddie Mac: $65.2 billion
- Total: $169 billion
According to the Fannie 10Q report filed with the SEC, their deficit this quarter reflected operating losses of $2.9 billion and a $2.3 billion dividend payment owed to the Treasury Department from previous quarterly bailouts. The dividend payment remains ironic in that Treasury is essentially giving money to itself, but it also remains critical in ensuring the GSEs do not get a free pass from the government in shrugging off their bad debt without consequence to emerge strong and try to reclaim life as a quasi-private institution again. The House has introduced legislation that would ensure this dividend stay in place, but it has not moved very much since getting a subcommittee hearing.
The good news in all this is that the band loans on Fannie Mae's books are shrinking. HousingWire reports, " Loans acquired between 2005 and 2008 accounted for roughly 34% of Fannie's entire book of business as of the end of the second quarter, down from 39% at the end of last year."
The bad news is that the government is still heavily in the mortgage game: "In the first half of 2011, Fannie Mae guaranteed roughly $306 billion in mortgages, enabling lenders to originate more than 1.2 million single-family and multifamily loans."
The even worse news is that we are now near the third anniversary of the Paulson Treasury Department taking over the GSEs and handing them over to FHFA in a tacit nationalization... and we are as close to addressing them today as we were then. In the video below (interview from last night) I express my frustration over this slow process—GSE portion of the conversation starts at minute 8:03:
See our post on 1Q2011 bailout requests from Fannie and Freddie for more detailed numbers.