We (taxpayers) are already on the hook for $200 billion (oh wait Bloomberg just did some actual math and came up with over $400 billion). And now Fannie and Freddie will receive relief without limits.
Massachusetts Congressman Barney Frank (a man whose math skills and business acumen rival a 4 year old) now considers Fannie and Freddie to be a “public policy instrument of the government,” and that they “have become a kind of public utility".
This "public utility" has implemented Loan Modification Programs and like all good government run entities, their ideas are terrible. Somewhere along the lines of 30,000 of the over 750,000 applicants for loan modifications have been approved and those that aren't are in danger of being forced into short sale (as according to the rules of the program) causing hundreds of thousands of homes to be put on the market. Granted its not as if anyone will actually follow the rules (this is America after all) but more harm that good has been done. The Treasury desperate to prevent another glut of homes going on the market, reacted to the fact that many of those who are trying to get relief are fudging their applications by significantly understating their income in hopes of getting undeservedly low monthly payments by issuing a mid-December directive ordering participating lenders not to penalize applicants for having done so. Associated Press columnist Rachel Beck described this move as “reward(ing) liars.” Expect more liars to apply for “rewards.”
I'm going to give you a little chart that shows the actuarial assumptions for default on debts incurred by borrowers with certain FICO scores.
Fannie and Freddie used to have a conventional mortgage threshold of 670 which meant that the was a less than 15% chance of you getting seriously delinquent on your debts (90 days or more late). This seems a fairly prudent approach to lending. BUT WAIT! Guess what Fannie and Freddie decided to do in the early 2000's....
The credit score threshold for conventional mortgages, which had generally been 670 or more, dropped to about 630. In the real world, a score of 630 indicates that you’re having trouble with your debt load, paying your bills on time, or a little of both.
More ominously, the credit score threshold for subprime mortgages, which had generally been 630 or more, fell to about 590. A score of 590 is the credit scoring equivalent of barely having a pulse.
To summarize, Fannie and Freddie are no longer controlled by independent shareholders. They are completely controlled by the Federal government and are acting as its agents and instrumentalities. Despite the formality of a conservatorship, there is no conceivable state of affairs where they can regain their solvency or independence.
Under any system of accounting rules, where one entity is completely owned and controlled by another, the owner must show the subsidiary’s obligations on the owner’s balance sheet as the owners liabilities.
The US government has not done this with Fannie and Freddie. Their more 2-5+ Trillion of obligations (depending on whether you include the loans securitized and dumped on unknowing investors) must be added to the US Governments outstanding debts of 12 Trillion. The result is a an increase in national debt of about 30-40% of GDP, which kicks us well over 100% of GDP.
Good Luck........
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