The Cost of Renationalising Fannie and Freddie

A post on Bruce Kasting's "My Take on Financial Events" presents some original analysis on the subject and is well worth the read. He looks at the condition of the two government-sponsored mortgage companies under the same 'stress test' criteria applied so noisily to 19 large banks. The results are rather disturbing: they will need $400 to $700 billion in loss-covering capital infusions.

Mind you, this is under the rather tepid 'stress' presented by the famous test. Obviously conditions could become much worse (and we expect them to). In any case this represents a low-end on the range of estimates. Our high-end estimate is close to $10 trillion, or substantially all of their assets. We are not being silly - actually. We expect housing prices to crash in a big, big way, and most owners with mortgages to simply 'walk away'. After neglect remediation and legal fees there will be little or nothing left for the mortgage companies.

So if the creditors of Fannie and Freddie are to be made whole (and this seems to be the plan), an awful lot of money is going to be anted up.

In our humble opinion, though, the greatest loss of all is the epic failure of these two Government programs. They distorted their original mandate to make mortgages widely available into creating mortgages for far too much money from people who couldn't afford them. The result was the housing bubble (as part of a larger, grotesque credit bubble and concomitant pseudo-economy) and subsequent real-estate led Depression. Beyond the loss of hundreds of billions (or trillions) of taxpayer dollars just for these two companies, are tens of trillions in losses throughout the economy, to say nothing of the shattered lives, suicides, homelessness, blighted communities, and who knows what horrors to come.

It is rather pathetic that Fannie and Freddie are being ordered to write more loans when they should just be liquidated. The attempt to 'keep the party going' will just make the damages and subsequent revulsion worse.