$25 billion price tag for Fannie, Freddie bailout

$25 billion price tag for Fannie, Freddie bailout
The Bush administration’s proposal to authorize the Treasury Department to purchase the debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks might cost taxpayers $25 billion over two years if exercised, the Congressional Budget Office estimates. But by merely granting the Treasury Department the authority to shore up the government-sponsored entities (GSEs) capital base, Congress might restore confidence in Fannie and Freddie enough to head off the need for a government bailout, CBO director Peter R. Orszag said in a letter to lawmakers.

"CBO’s estimate recognizes that there is a significant chance — probably better than 50 percent — that the proposed new authority for the Secretary would not be used before it expired at the end of December 2009," Orszag said. "If the proposal is enacted, private markets might be sufficiently reassured to provide the GSEs with adequate capital to continue operations without any infusion of funds from the Treasury; during that time, it is possible that expectations about the duration and depth of the downturn in the housing market may brighten."

But Orszag said many analysts and traders see "a significant likelihood" that conditions in the housing and financial markets could deteriorate further, increase the probability that a bailout would be required.

Orszag said CBO’s modeling of Fannie and Freddie’s $5.2 trillion "book of business" — loans guaranteed by the companies and mortgage-backed securities held for investment — suggested a 50 percent chance that the GSEs’ losses won’t be greater than the companies have already recognized. But there’s a 5 percent chance of an additional $100 billion in losses, he said, in which case the government would have to provide about $25 billion in capital to keep the companies solvent.

GSEs counting on private mortgage insurers
Fannie Mae and Freddie Mac have "significant credit exposures" to private mortgage insurers, with just four companies providing about three quarters of coverage, federal regulators said in their annual report on the financial performance of the government-sponsored enterprises, or GSEs. The report, "Mortgage Markets and the Enterprises in 2007," said that Fannie and Freddie’s total exposure to mortgage insurers rose from $119 billion at the end of 2006 to $159.8 billion at the end of 2007. Mounting losses have led rating agencies to downgrade the insurer financial strength ratings of most mortgage insurers, below levels Fannie and Freddie once required them to maintain. Although the companies are thought to be adequately capitalized to pay claims on loans they already insure, their ability to underwrite new loans may depend on their ability to raise additional capital (see story).

The report also noted that the GSEs had $11.1 billion in pre-tax losses in 2007, the report said, even as they increased issuance of mortgage-backed securities by nearly one-third "as competition from the private-label market virtually ceased in the second half of the year. Combined purchases of single- and multifamily mortgages, including cash purchases from lenders and swaps of whole loans for MBS, were up 31 percent in 2007, to $1.2 trillion.

Wachovia closes wholesale loan channel
Wachovia will no longer make home loans through mortgage brokers, and the company is redeploying 1,000 workers from originations to loss mitigation to help customers refinance and restructure "Pick-a-Pay" mortgages, the company said in a regulatory filing. Wachovia has cut 2,000 jobs in mortgage lending through June, and plans to cut the equivalent of another 4,400 jobs in the next 12 months, the company said. The company announced the job cuts, the closure of its wholesale mortgage origination channel and a reduction in the dividend paid to common stock holders to 5 cents a share as cost-cutting measures to address an $8.9 billion second-quarter loss. The loss included a goodwill impairment of $6.1 billion related primarily to a 37 percent decline in Wachovia’s market capitalization from the previous quarter, to $33.5 billion as of June 30.

Wachovia’s losses included $682 million in consumer real estate, including $508 million in the Pick-a-Pay portfolio, $130 million in home equity, $32 million in traditional mortgage and $12 million associated with non-branch-originated alt-A loans. Pick-a-Pay mortgages, or payment-option adjustable-rate mortgages (ARMs), are considered "exotic" loans by regulators because they allow borrowers to vary their monthly payments and, in some cases pay so little that their loan balance grows. Wachovia last month announced it would no longer allow payment options that result in "negative amortization" on Pick-A-Pay mortgages, and was waving prepayment fees on the loans to help borrowers refinance into other loans.

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