By Pete the Banker:
The Administration and the Treasury over the last month have been publicizing the alleged success and relatively low cost of TARP. However they are silent about the ultimate cost of rescuing Fannie Mae and Freddie Mac which to date has cost the Treasury and ultimately the American taxpayer $150 Billion in capital injections.
One year ago the Congressional Budget Office estimated that the total cost of rescuing the two former GSE’s would approach $291 Billion over the next decade (previous post). In past month, the Federal Housing Finance Agency has estimated that in the worst case the cost will approach $363 Billion by 2013. Last month Standard & Poor’s suggested that the ultimate cost of Fannie Mae/Freddie Mac bailout and reorganization would approach $675 Billion by 2019.
Other analysts have suggested the ultimate cost will exceed $1 Trillion.
The true total economic cost, the cost of decades of misdirected government housing policy culminating in an unprecedented market collapse in 2007 may approach $5 – $6 Trillion based on the 30%+ decline in housing values since 2005.
Regardless with the delay in reforming these former GSE’s, the cost mounts by the day as the housing and residential capital markets grow worse with sales & financing of housing sales remaining anemic. The housing and housing finance markets’ decline or “double dip” is now a serious threat to the tepid economy rebound. Despite the Mass Media’s much heralded and publicized month over month increase of 10% in existing housing sales in September, those sales were down by 19% year over year.
The National Association of Realtors has subsequently issued October Existing Home Sales numbers which fell 2.2% from October and nearly 26% from the year earlier. Mortgage financing volume has been declined by over 33% since last Spring with the expiration of the “first time” home buyers’ tax credit. With sales & financing of sales transactions anemic, financing activity consists almost entirely of refinancing of existing loans. The MBA predicts the total volume of new residential loans in 2011 will be $1 Trillion down by 33% from $1.5 Trillion in 2010 and down by 60% from the $2.3 Trillion in 2007. This despite record low interest rates in past few months.
The Administration and the Democrat Congress have continuously delayed implementation of badly needed reform of Fannie Mae, Freddie Mac and the FHA over the past year and a half. While Fannie and Freddie continue to belch red ink and with the FHA’s cash reserves still below statutory required 2% minimum more than a year after originally disclosed with the Administration failing to take corrective action, these three government monopolies continue to provide 90% of residential financing, squeezing out the private sector and relying upon taxpayer generosity to continue operations. And given the Administration’s failed HAMP/Hope Now modification and other loan programs with aggregate costs of ~$80 Billion (not included in the latest released TARP or GSE cost figures); the inventory of homes on the market continues to climb putting downward pressure on housing prices. Standard & Poor’s along with other analysts are now predicting that housing values will decline another 7% – 10% before the housing market reaches a bottom.
With continual deterioration in sales of homes and residential financing volume, Fannie and Freddie will face falling revenue & profitability in the immediate future, requiring greater injection of capital by the Treasury and increasing the ultimate cost of the bailout of the GSE’s. Even with rapid action by the newly elected Republican Congress and assuming Administration cooperation, reform legislation and implementation of reforms will take several years. In the meantime the losses and costs of delayed Government reform will continue to climb and ultimately will likely rise to the $1 Trillion figure and beyond, dwarfing the Administrations self professed acclamations of success in the TARP program.
