Black Hole Alert: Fannie, Freddie Cash Needs May Exceed $200 Billion

The Freddie/Fannie conservatorship, which seemed like an epic event at the time, was succeeded by so many crises, Lehman, the September/October meltdowns, AIG, the European bank rescues, that it seems like a distant memory. But the Treasury made a commitment to maintain positive net worth for both the mortgage lenders/guarantors and was remarkably non-specific as to what the damage over time might be (a $100 billion authorization for each from July looked to be more than adequate, or so we ere told). CBO estimates were not helpful, since the Treasury commitment was formally through the end of 2009 (meaning that time frame was all the CBO could opine on) when the backup would clearly be renewed.

Bloomberg gives us an update, and of course, the liability simply through the end of 2009 is much bigger than the officialdom pretended:

Fannie Mae and Freddie Mac, the mortgage-finance companies seized by regulators, may need more than the $200 billion in funding pledged by the U.S. government if the housing market continues to deteriorate, Federal Housing Finance Agency Director James Lockhart said….

“When we sized the amount in September, we obviously looked at stress tests and what was happening in the marketplace,” Lockhart said. “There’s been some significant events since then that weren’t in our forecast.”

Yves here. Ahem, by September, many forecasters were looking for housing prices to revert to historical norms in terms of their relationship to income and rents. That suggested a 30-35% fall from peak to trough. That’s before you get into overshoot due to rising unemployment and typical bank tightening of lending standards in downturns. Back to the article:

The government seized control of Fannie Mae and Freddie Mac after their losses threatened to further disrupt the housing market, and pledged to invest as much as $100 billion into each company as needed if the value of their assets drops below the amount they owe on obligations.

Fannie Mae said in a November regulatory filing that “this commitment may not be sufficient to keep us in solvent condition or from being placed into receivership.” Freddie Mac is taking a “hard look” at whether it will need more than $100 billion, [Chairman John] Koskinen said last week….

Federal officials are now leaning on the government- sponsored enterprises to help stabilize the housing market. House Financial Services Committee Chairman Barney Frank said last week that the companies will be used “very aggressively” to help reduce record foreclosures.

Lockhart said Fannie Mae and Freddie Mac aren’t expected to take a loss “under any program” that requires their involvement. “We would expect them to be writing business that’s profitable at this point, not a large profit,” he said yesterday. “But we would not expect them to be writing business at a loss under any program.”.

And that has been the recent problem. The GSEs have been and remain under pressure to keep the housing market afloat, when they are already badly impaired and require regular cash transfusions.

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  1. eh

    “There’s been some significant events since then that weren’t in our forecast.”

    No problem Mr Lockhart. Shit happens.

    I think at this point I’d prefer more ‘quantitative easing’ by having the Fed create whatever money is needed by FNM and FRE rather than continue with the current practice of the government selling debt for that purpose. Even if this means totally trashing the dollar; I guess I’ll be staying home and ‘buying American’.

    And to all of those holding ‘eurodollars’ in whatever shape or form: Sorry! Bad investment there. Next time try maybe Edward Jones financial advisors — I’ve been seeing a lot of commercials from them lately.

  2. russell1200

    Where is the cash presure coming from? Presumably the pass through on the bonds to investors (?).

    If that is the case, what you would really want to know is how much money their vehicles are passing through on a month to month basis. Not the absolute amount of money owed.

  3. Martin, the Netherlands

    As a European, I am rather surprised that the American public accepts that their government is putting such large sums at the disposal of banks without ensuring that the government has more influence on how they are run. No board members are sacked, no voting rights are insisted upon…

  4. Anonymous

    Well, Martin, IMF-style “austerity programs” are for the little people in poor countries, not modern banks in glittering towers in the financial capitals of the world.

  5. Martin, the Netherlands

    Ah, now I see where I got it wrong.;) By the way, I'm currently reading "The Roaring Nineties" by Joseph Stiglitz. Fascinating stuff. Written just after Enron went bust, etcetera. He repeatedly shakes his head about the S&L-bailout, how it had cost your taxpayers over $ 100 billion. Do I understand correctly that Bloomberg, today, had calculated that so far some 6.9 trillion dollas has been spent to keep the US banking system from collapsing, and that Mr. Geithner has just announced a $ 2 trillion programme? Money isn't what it used to be…

  6. doc holiday

    Flapping wings, in a violent rage and crowing as loud as possible — My American flag is flying upside down and it’s time for an S.O.S:

    “Stimulus? The Dollar Is Toast” Says Harvard MBA Juan Enriquez

    Says the Harvard trained MBA,

    The only part of the economy that generates new output are start-up companies. The fortune 500 have generated net negative jobs over the last 30 years. It's startup companies that are .2 percent of GDP that have generated 17.8 percent of economic output. That's where we've got to be investing.

    Enriquez has a strongly worded warning for President Obama: "Quit spending money you don't have, because our kids – it isn't just our kids who are going to pay for it, we're going to pay for it and this crisis is going to get a lot worse if we don't start controlling our spending."

    >> Juan Enriquez
    The day started on a sobering note with Juan Enriquez, a philosopher and researcher, who explored how the U.S. economy is floundering but encouraged people to “dance through the flames” and focus on the long term.

    > If you have not seen him speak, go here: Dialogue on the Global Economic Crisis

  7. bena gyerek

    aaaaaaaaaaaaaaaaaaaaaaaaahhhhhhh!!!! we’re all being sucked into a black hole. my future earnings are being spaghettified!!

    oh wait, i’m not us tax resident any more.

  8. Anonymous


    Your average American is not fully aware of the epic scale of the fraud and theft being perpetrated on them. Imagine some tragic mix of ignorance, self-satisfaction, confusion, and vague fear. If they voted for Obama, add some post-election irrational Hope.

    Anger is increasingly becoming part of the blend, but I think most will not be deeply outraged until they lose their job, and take a moment to assess the landscape.

    I myself looked with envy at France’s general strike. Such an outrage in the US – given the implicit threat that we are a heavily armed and slightly crazy populace – might well have brought the plutocrats to heel.

    For now, the lootings will continue. (A bond market dislocation can of course change that overnight.)

  9. Anonymous

    Meanwhile, Fannie and Freddie are turning down cash offers for properties on a daily basis in their continuing mark-to-fantasy-because-we-can-get-bailout-money mod eof operation.

  10. AP

    Martin, the Netherlands:

    We have been dumbed down through atrocious public education… and you should see our television programming that so many millions are plugged into. I swear I have tomentally downshift for it to keep my attention.

    Americans are medicated and apathetic, so it’s no surprise that they have taken all of this laying down.

  11. Anon1

    Can anyone explain this? I have repeatedly read of estimates that the big banks that Geithner/ObamaBushPaulson are so desperately trying to save by tossing OUR money at their execs and mismanagers actually hold 10s of trillions in liabilities due to the non-value of their “assets”.

    If true, how can ANY amount of money realistically thrown at them fix anything? If there is not enough money on earth to pay for down the liabilities held by these banks in their bad investments, how the f*ck is 1 or 2 trillion bucks supposed to fix anything…unless the real plan (and desperate hope) is to re-inflate the realestate market so that they can all sell their investments at break-even or even a profit – and THEN let the new bubble burst on the rest of us instead?

  12. Anonymous

    “House of Cards,” the definitive look at the origins of the economic crisis, premieres on Thurs., Feb 12 at 8pm ET on CNBC. See the inside accounts from key players, tracing the calamity from Main Street to Wall Street to Washington. CNBC even reveals how one savvy investor even profited – by 600% – as the house of cards fell. Watch preview and see web extras at

    This is the definitive record of today’s unprecedented economic crisis.

  13. Anonymous

    Slight glimmer of hope as no House Republicans and only 3 Senate Republicans sided with the Democrats on the Stimu-less package so far.

    Dislodging the cornerstone of corruption in income taxes and unfunded spending and usury is no small feat.

    Consumers can not or will not spend so the markets are going to have to adjust. Don’t expect any good results if the Government tries to replace the consumers.

  14. lineup32

    martin: Americans unlike the rest of the world can buy with little or no cash using OPM/credit, auto’s, RV’s, large homes, motorcycles, large screen TV, computers, vacations, and lets not forget for our public employmee’s 90% income retirement and if you are lucky enough to be a federal employee well two or three retirement packages are in your future! So while the rest of word may consider Americans NASCAR lifestyle over the top we want to thank you for buying our T-bills and agency debt keep up the good work.

  15. Anon1

    The more Geithner talks, the more I see the need to invest in brass for reloading purposes.

    Also need to stock up on powder.

  16. FairEconomist

    I have no access to specific numbers, but the foreclosure moratorium must be making their losses explode. Every month of moratorium is a month of lost payments, and when you have thinly-capitalized entities like Fannie and Freddie that are *supposed* to operate on the margin of rare defaults, that rapidly becomes catastrophic. Just 3 months of nonpayment would soak up all of a typical 1.5% fee.

  17. doc holiday

    Can we all just agree that The FASB sucks and is corrupt beyond a shadow of a doubt — which is on topic in terms of why we have the lack of accounting which brought us to this point, along with a bogus SEC!

    FI: July 30 (Reuters) – The Financial Accounting Standards Board, which sets U.S. accounting rules, voted on Wednesday to delay accounting changes that would affect trillions of dollars in off-balance sheet assets at banks and financial companies.

    Reversing an earlier decision to make some parts of the rule change effective at the end of this year, FASB members voted that the rule should take effect all at once, for reporting periods after Nov. 15, 2009.

    Shoot these bastards or hang them for treason, just somebody, somewhere, please, please do something other than act retarded or corrupt!!!! Obama, your toast and guilty by association!!!

  18. Early Withdrawal

    Martin, the Netherlands said…

    “As a European, I am rather surprised that the American public accepts that their government is putting such large sums at the disposal of banks without ensuring that the government has more influence on how they are run. No board members are sacked, no voting rights are insisted upon…”

    Martin as American’s we’re rather surprised too. But hero worship after 8 years of govt of mass destruction seems to have a long leash.

    Of course the Obamanacs will never own up to being so stupid for having supported him through this, just as conservative voters will never own up to having enabled Bush and his disastrous administration.

  19. Steve

    On 10/12/08, Dow Jones reported that Paulson had “ordered” Fannie and Freddie to purchase $40 billion per month of impaired subprime and Alt-A MBS. One assumes priced at the holders’ carrying values.

    This couldn’t possibly be related to Lockhart’s cash call, of course. Nah, shit just happened…

    How much have the GSEs lost to date on this gift program? Why isn’t anyone in Congress asking?

  20. Anonymous

    I agree with the European poster…why are we in America just going along with this? I don’t have a clue. Some theories:

    – Naive trust in the government
    – Fear of losing everything
    – Short attention span
    – Denial – it hasn’t hit home yet that there is a problem, so who cares? I still have a job

    I’ve noticed that people are getting very edgy; even driving to work, people are getting crazy.

  21. Anonymous

    Obviously Geithner has seen the numbers and is so shell shocked that he has frozen in his tracks. And I don’t mean to disparage our leader but he makes the previous leader appear as if a scholar.

    Congress is more interested in getting reelected so they pretend all this is not really happening.

  22. Anonymous

    Freddie’s Dead

    Everybody’s misused him,
    Ripped him up and abused him,
    Another junkie plan,
    Pushin dope for the man.

    Freddie’s on the corner now.

    Oh Where is Our Superfly?

  23. Anonymous

    Freddie’s Dead – that’s pretty good

    … and if you don’t mind

    The Weight – by The Band

    Take a load off Fannie
    Take a load for free
    Take a load off Fannie
    And you put the load right on me

  24. ruetheday

    Market Capitalization

    BAC – 27.9 billion
    Citi – 18.3 billion
    JPM – 91.9 billion
    WFC – 69.1 billion

    Total Market Cap – $207.2 billion

    Can someone tell me why we just announced we’re going to spend:

    $250-500 billion to acquire bad assets from these banks
    $1 TRILLION for the Fed to buy securitized assets
    $50 billion in mortgage mods for foreclosure prevention
    An undisclosed amount ($100 billion+ in direct capital injections)

    Instead of just BUYING these 4 banks?

    Morgan Stanley and Goldman, TOGETHER, have a market cap of $64 billion.

    Fannie and Freddie (of which the gov’t already owns 79.9%) have market caps in the hundreds of millions only.

    Across the board, bank market caps are in the dump.

    The government could simply buy all the problem banks for a fraction of what they’re spending on asset purchases/insurance/other nonsense.

  25. Anonymous

    CNBC? you mean the network that thru a ticker tape celebration when the DOW past 14,000 in 2007(big clue to pull out of the market at the time). The same network that never said a word about this until 2 years later? If I need to listen to them tell me why we are here now, I am in big trouble. No thaks.

  26. doc holiday


    It's been about a week or two, but last time I checked, the total combined market cap of Ford & GM was less that 50% of Avon Corporation — and ah, yah, we need a few trillion to bail out the auto makers (along with worthless wall street banks) because they were all so well educated @ Harvard and so Friggn talented at burning cash and God forbid that any of these people involved in this shitpile be fired or placed in prison — because they just have too much damn value and obviously add value to The American Dream and our GDP and all that other voodoo doll shit …. puke, puke… ahhhh

  27. Anonymous

    I want to short the entire World IB’s and Uuberments that had a hand in this cow dung pile. Square one stuff. Let see how they transition to domestic duty’s, lots of dirty feet out there need cleaning aka the tax payers.


  28. Anonymous

    Do you really want all the banks to become nationalized where the taxpayer has to pay the debt off that is 4X the world’s GDP.

    This is the dilemma.

  29. Anonymous

    It appears that Fannie and Freddie lost roughly 200billion in a quarter and you would have to ask whether this will continue until house prices stop falling early next year. While home owners are allowed to make up valuations for their houses to circumvent bank risk rules then these losses seem likely to continue. This bill comes on top of the fact that the treasury is having to buy the Fannie and Freddie debt because no international investors will touch it with a barge pole. Black hole is right and who cares about another couple of trillion of taxpayers money spent or printed. This is all about lowering payments for people who cannot pay due to risk assessment levels rising. Circumventing the rules just loads the taxpayer up with risk and just delays the deleveraging of personal debts which need to take place to meet realistic debt risk assessment. For those that loose their jobs or suffer a one of income impairment then mortgage holidays are an appropriate course of action, for those that are just out of their depth, then why should they be subsidized by everyone else. Sure prices will drop, but they will be on the rise again far sooner.

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