We still> need more.
That is the message from both mortgage giants, Fannie Mae and Freddie Mac, which have reported their first-quarter financial results in the past week. With the reports come yet further requests for funding from the Treasury Department. Fannie is asking for $8.4 billion, while Freddie has its hand out for $10.6 billion.
Have either of the agencies made any recent progress in regaining their financial footing? It depends on how you define progress. In the first quarter of this year, Fannie reported a net loss of $11.5 billion, less than its $15.2 billion loss in the previous quarter. That s a pretty steady trajectory, down from $23.2 billion a year ago. All told, Fannie had drawn $75.2 billion from Treasury to cover its deficits, as of Dec. 31.
For its part, Freddie last week reported a net loss of $6.7 billion for the first quarter, more than its $6.5 billion loss in the previous quarter, and requested another $10.6 billion from Treasury. That compares with a net loss of $9.9 billion in the first quarter last year. In all, Freddie has drawn $50.7 billion from the government so far.
Fannie Mae was created as a federal agency in 1938 to purchase FHA-insured mortgages originated by private lenders, thereby helping to ensure a steady supply of mortgage credit. The agency was made into a government-sponsored private corporation in 1968, and Freddie Mac was created in 1970. Both companies were brought under government conservatorship in 2008.
Both Fannie and Freddie have said that further Treasury funding will be necessary in the future. Economists say these periodic bailouts are the price the government is paying for some measure of stability in the mortgage market.
So when will taxpayers finally be off the hook? Here are three economists views on what needs to be done with Fannie and Freddie:
David Wyss, chief economist at Standard & Poor s:
The losses at Fannie and Freddie will continue until the current wave of foreclosures is over, likely in 2012, Wyss says. A quick solution is impossible, and would be inadvisable anyway, because any sudden changes at Fannie and Freddie would destabilize an already uncertain market, he says.
Going forward, Congress needs to bring clarity to the confused, quasi-governmental nature of these entities, Wyss says. You had a government guarantee on top of an operation that was supposed to be operating for private profit, and I m not sure that is ever going to be a stable situation without extremely strong regulation, he says.
Fannie and Freddie will need to be fully privatized or made into government agencies, Wyss says. Under a privatized system, mortgage rates would rise and borrowers would see more adjustable-rate loans. Loans that banks keep on their own books are supported by deposits and other inherently adjustable-rate funds, and securitization of mortgage loans is likely to be more difficult and expensive in the wake of the recent crisis, Wyss says. On the other hand, keeping these entities public leaves taxpayers on the hook for huge losses, he says.
The proper form for Fannie and Freddie is a political, not an economic question. But whatever the solution, lending standards will have to be tighter and homeownership will be available to fewer people, Wyss says. You ve got to accept that there is a definite cost to promoting homeownership for all, he says, and we ve just figured out what it was.
Korok Ray, assistant professor at Georgetown University s McDonough School of Business:
Fannie and Freddie are insolvent in large part because they ve been underpricing their premiums for decades, Ray says. They either need to insure less-risky loans, hold more capital to protect against potential losses, or charge more for the insurance they provide, he says.
Fannie Mae had also held a variety of assets on its balance sheet, supposedly to hedge against losses in its mortgage portfolio, but that strategy essentially made the company a publicly sponsored hedge fund, Ray says. The recent crisis has demonstrated the difficulty of finding assets that truly are inversely correlated with one another in a severe downturn. The better way to reduce risk is not to hedge but to actually take on less risk, Ray says.
Raising premiums could help in the near term, but in the longer term Fannie and Freddie s assets should be sold and their function should be taken over by the private sector, Ray says. That change would increase the cost of borrowing and ultimately decrease the rate of homeownership, but the current system simply does not work, he says. Politicians sometimes want homeownership at any price, but the question is, when is it too much? he says.
Lawrence White, professor of economics at New York University s Stern School of Business:
All of these losses are the delayed recognition of the bad loans that Fannie and Freddie bought prior to 2008, White says. There s no going back, you can t rewind the clock.
In the short run, the question is whether Fannie and Freddie have stopped making bad loans which White believes they have. In the longer term, the administration needs to develop a plan for the ultimate fate of these companies, he says.
True privatization is the best option, White says. Privatizing Fannie and Freddie would ultimately push mortgage rates up about a quarter of a percentage point and that s a good thing, he says. Like most other programs meant to encourage homeownership, Fannie and Freddie s actions in the secondary mortgage market don t encourage homeownership -- all they do is encourage people who would buy anyway to buy a bigger house, White says. With Fannie and Freddie privatized, other, on-budget, government programs could provide more targeted support to a smaller group of first-time buyers truly on the fence between renting and owning, he says.