Rescue of Freddie and Fannie may hit $259 billion

WASHINGTON - The government spelled out Thursday just how much the most expensive rescue of the financial crisis is apt to end up costing taxpayers: as much as $259 billion for mortgage buyers Fannie Mae and Freddie Mac.

That figure would be nearly twice the amount Fannie and Freddie have received so far. To date, the rescue of the two companies has cost taxpayers $135 billion. The companies have repaid $13 billion to the Treasury Department as dividends.

By contrast, the combined bailouts of financial companies and the auto industry have cost taxpayers roughly $50 billion, according to Treasury's latest projections. The bailouts of Wall Street banks alone, which sparked public fury, have so far brought taxpayers a $16 billion return.

Once the housing bubble burst and foreclosures soared, Fannie and Freddie were battered by losses on loans they had backed. The two companies buy home loans from lenders, package them into bonds with a guarantee against default and sell them to investors.

On Thursday, the government provided a broad estimate of the costs of bailing out Fannie and Freddie. The final cost will depend on the direction of home values over the next few years. If prices fall sharply, as some analysts forecast, Fannie and Freddie won't be able to recover as much money on foreclosures. They would require more taxpayer aid.

The Fannie-Freddie bailout could end up costing taxpayers $142 billion to $259 billion through 2013, the Federal Housing Finance Agency projected. The worst-case scenario assumes the economy would fall back into a recession and home prices would sink an additional 24 percent until early 2012.

The best-case scenario assumes home prices remain flat for the next two years.

"If the economy does unravel in the next couple of quarters, then the costs will mount very rapidly," said Mark Zandi, chief economist at Moody's Analytics.

The agency's figures take into account dividends that the agency estimates Fannie and Freddie will end up repaying. The terms of their rescue require them to pay a 10 percent annual dividend to the Treasury. That amount is expected to balloon in coming years. Regulators expect Fannie and Freddie to repay an additional $67 billion to $91 billion in dividends over the next three years.

The two mortgage-finance companies have been operating under federal control for more than two years. When the government stepped in to take them over in September 2008, their rescue was expected to cost a combined $200 billion.

Allegations that mortgage lenders nationwide cut corners on foreclosure documents as they moved to seize millions of homes have put Fannie and Freddie under scrutiny. The two companies have used so-called foreclosure-mill law firms that are accused of processing thousands of files in haste.

Several banks have been accused of similar conduct. If they can't resolve their foreclosure problems and are barred from seizing many homes, Fannie and Freddie could absorb huge losses on loans they own or guarantee. That's because they would no longer be able to recover anything on loans that have gone bad.

Delays in foreclosures would hurt Fannie and Freddie in areas of the country where home prices are falling. The longer they wait to sell homes, the less money they stand to recover.

But some analysts doubt the document mess will have much impact on Fannie, Freddie or the pace of foreclosures. It's likely to result in weeks of delays for foreclosures, not months, Zandi said.

Fannie and Freddie own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans worth more than $5 trillion.

by Alan Zibel Associated Press Oct. 22, 2010 12:00 AM



Rescue of Freddie and Fannie may hit $259 billion