A Bargain Bailout? What saving Fannie and Freddie will cost you. - Newsweek

[sinkingfeeling]

http://www.newsweek.com/id/146257

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But the actions don't amount to a bailout—yet. The announcements simply constituted the final explicit declaration of what investors, politicians, and policymakers around the world have long taken as an implicit assumption: that the U.S. government would back the debt of Fannie Mae and Freddie Mac. Questions have been raised about the potential cost to taxpayers if the government ultimately does have to help the two companies make good on the debt they've sold to investors. But as it turns out, under almost any circumstances, the bailout will be a bargain for American taxpayers, because any cost of it will be overwhelmingly offset by the tangible and quantifiable economic benefits that taxpayers have collectively received over the years from the market's expectations that such a bailout would materialize if needed.

But 25 basis points—one-quarter of one percentage point—can add up to significant savings on large amounts of money. At the end of 2007, Fannie and Freddie held or guaranteed mortgages worth about $5.2 trillion. (The annual report of OFHEO, the regulator of Fannie and Freddie, has great historical data on the two companies. Information on their balance sheets can be seen in Table 22.) This means that borrowers saved about $13 billion in 2007 on interest costs, thanks to the GSEs. The numbers were lower in previous years. Assuming a 25-basis-point savings, the savings were $7.5 billion in 2001 and $3.25 billion in 1994. Calculating the cumulative present-day value of the historic implied guarantee—after all, $3.25 billion in 1994 is worth about $4.75 billion in today's dollars—would be a complicated task. But after laying out all sorts of caveats, Lawrence White believes it could add up to more than $100 billion in current dollars.

..... But it's hard to imagine it would approach a figure close to $100 billion. Fannie Mae and Freddie Mac didn't make subprime loans, although they do have some exposure to subprime debt through assets they purchased. Rather, they make loans to people who make down payments and who buy houses under a certain price (the maximum loan last year was $417,000). As a result, the companies avoided funding lots of mortgages in expensive, bubbly markets. In the fourth quarter of 2007, the delinquency rates for mortgages on single-family homes were 0.65 percent for Freddie Mac and 0.98 percent for Fannie Mae.