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

[RedEarth]

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:

more..........

http://www.nakedcapitalism.com/2009/02/black-hole-alert-fannie-freddie-cash.html