Fannie, Freddie Unlikely to Return Aid: Regulator Openly Doubts Firms Can Repay All $85 Billion

The Washington Post
Fannie, Freddie Unlikely to Return Aid
written by Zachary A. Goldfarb, Staff Writer
Friday, July 31, 2009

The regulator of Fannie Mae and Freddie Mac said it was unlikely that the federal government would ever be paid back the entire $85 billion spent so far on bailing out the firms -- and added that the cost was going to rise as additional funds are drawn.

"Their book is so large," James Lockhart, director of the Federal Housing Finance Agency, said at the National Press Club. "It's hard for me to see that they will be able to repay all of that."

Lockhart's comments were a blunt acknowledgment that while the government has long said its bailout of the financial sector largely represents an investment that will be repaid, billions of dollars are likely to be LOST.

Some banks, such as Goldman Sachs and J.P. Morgan Chase, have successfully returned taxpayer money, and most other banks are expected to do the same. But the prognosis for the return of the government investment in several major firms, including American International Group (AIG) and General Motors (GM), is less clear.

The government seized District-based Fannie Mae and McLean-based Freddie Mac, the nation's two major providers of money for home loans, nearly 11 months ago as the economic crisis intensified.

The Bush administration committed $200 BILLION to keep them solvent, a figure the Obama administration DOUBLED when signs appeared that the companies were eating through that cushion at a faster-than-expected pace.

The government suggested that elements of the bailout would be profitable for taxpayers -- and required a hefty 10 percent dividend to be paid by Fannie Mae and Freddie Mac in exchange for investments by the government. The annual dividend the companies now pay rivals their annual profits even in the good years.

Fannie Mae and Freddie Mac may need more draws on the Treasury's purse down the road. The companies, which own or insure more than $5 TRILLION in home loans, won't stop losing money for another year or so, Lockhart said.

The companies have been called upon to carry out a large part of the Obama administration's housing recovery program, which includes modifying the terms of home loans to help borrowers avoid foreclosure and, with the assistance of the Treasury and the Federal Reserve, flooding the mortgage market with money to keep rates low.

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