November 13, 2009
The Wall Street Journal is reporting that Fannie Mae and Freddie Mac, which have already consumed $112 billion in taxpayer bailouts, may have additional losses if they can’t recoup claims from struggling private mortgage insurers.
From the Journal:
Fannie Mae has about $109.5 billion of mortgage-insurance coverage in force, which represents 4 percent of all single-family home loans it owns or guarantees. Freddie Mac had $63.4 billion in mortgage insurance and $12.2 billion in bond insurance. Private mortgage insurance is required for any home loan with less than a 20 percent down payment, and the policies typically cover 12 percent to 35 percent of losses in the event of a default, according to HSH Associates, a financial publisher. Mortgage insurers have been forced to pay up as loan defaults escalate.
Escalating loan defaults are also likely to bite taxpayers through the Federal Housing Administration, which covers 100 percent of losses. The FHA is in deep trouble:
The reduction in private insurance coverage has contributed to the rise in the volume of loans backed by the Federal Housing Administration, a government mortgage insurer that backs loans with as little as 3.5 percent down payments. It could be required to ask for a federal subsidy for the first time in its 75-year history if the housing market deteriorates further.
Who is looking out for taxpayers here?
Ryan Grim at Huffington Post reports that the Federal Housing Finance Agency, which is in charge of Fannie and Freddie, has used a legal technicality to rid itself of its inspector general:
There is no independent auditor overseeing the federal agency responsible for some $6 trillion in home mortgages, because the Department of Justice's Office of Legal Counsel ruled that the agency's inspector general didn't have authority to operate, according to internal memos obtained by the Huffington Post. The ruling came in response to a request from the Federal Housing Finance Agency itself -- which means that a federal agency essentially succeeded in getting rid of its own inspector general.
The timing is curious:
Fannie and Freddie are burning through cash at a staggering rate. Fannie reported a loss of $18.9 billion in the third quarter of 2009, four billion more than it lost the second quarter. FHFA requested $15 billion from Treasury to plug the hole. What's it spending money on? ‘The company continued to concentrate on preventing foreclosures and providing liquidity to the mortgage market during the third quarter of 2009, with much of our effort focused on the Making Home Affordable Program,’ boasts the press release accompanying the announcement of the massive loss. ‘As of September 30, 2009, approximately 189,000 Fannie Mae loans were in a trial period or a completed modification under the Home Affordable Modification Program.’ Those are the precise programs that Kelley was looking into when his own agency shut him down.
See here for essays on the problems associated with the federal government’s housing market interventions. Also check out Johan Norberg’s book, Financial Fiasco: How America's Infatuation with Homeownership and Easy Money Created the Economic Crisis.