Professor Cole's Finance Blog

Last week, Fannie Mae and Freddie Mac posted earnings for the third quarter 2009, after which Fannie asked the U.S. Treasury for an additional $15 billion in taxpayer assistance, on top of the $45 billion it has already received. Fannie lost $19.8 billion in the third quarter of 2009, which was better than the $29.4 billion it lost in Q3 2008 but worse than the $14.8 billion it lost in Q2 2009. That said, here is the money quote from Fannie's press release:

"We expect that our credit losses and credit loss ratio will continue to increase for the remainder of 2009 and during 2010. However, we also believe that, absent  further economic deterioration, our credit related expenses will be less in 2010 than in 2009."

In other words, the residential real estate and RMBS markets are going to get a lot worse before they get better, possibly in 2011. During the interim, expect Fannie to be coming back each quarter asking for another $10-$20 billion.

Freddie Mac reported a third quarter 2009 loss of only $6.3 billion, which was a great improvement from Q3 2008, when it lost $25.3 billion, and said that it didn't need any federal aid at this time. However, it went on to say that it expects to ask for more taxpayer dollars in future quarters, as it expected credit-related losses to climb during the rest of 2009 and during 2010 as the housing market continues to deteriorate.

The biggest losses at both companies have come from subprime and Alt-A  mortgages that they bought and guaranteed during the peak years of the housing bubble in 2006 and 2007, as they sought to curry favor with Senate Banking Committee Chairman Chris Dodd, House Banking Committee Chairman Barney Frank and other housing zealots in Congress and regulatory agencies who were pushing mortgages for low-income borrowers who could not afford to repay them.

In combination, Fannie and Freddie have tapped the U.S. taxpayers for $112 billion thus far, trailing only the $160 billion provided to AIG; but look for the housing giants to take first place sometime during 2010. Treasury has committed to providing as much as $200 billion to each company or $400 billion total.

Meanwhile, lurking in the shadows is the FHA, which took over the heavy lifting in the residential mortgage markets after the federal takeovers of Fannie and Freddie last year. According to the American Banker, the FHA has delayed release of an audit of its capital reserves, fueling speculation that FHA, like Fannie and Freddie before it, will need a multi-billion dollar taxpayer bailout.

Our country's failed housing policy continues to haunt the taxpayer and, apparently, will continue to do so for at least another couple of years. Why did our legislators push so many qualified renters that were unqualified borrowers into home ownership, and, now, into foreclosure and, in many cases, bankruptcy?