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Paul Kiesel
Paul Kiesel
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A Trillion Dollar Risk

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Fannie Mae and Freddie Mac, two financing giants, might be in need of some financial help, as early as this summer. And it’s looking like they’re going to need a lot of help; somewhere between $420 billion to $1.1 trillion worth of help.

And it is almost certain that, if these two companies need an injection of hundreds of billions of dollars, the U.S. government will provide it, as both companies are know as government-sponsored entities because they have Congressional charters, which implies that the federal government is behind them.

Some might ask, “Why bother helping them at this point? And especially with that much taxpayer money!” Unfortunately, both companies are vital to the credit and mortgage market and they help in particular the mortgage market function as smoothly as possible by purchasing pools of loans and then packaging them into what is known as mortgage-backed securities. Long story short, if Fannie and Freddie need the money, our government will provide it, whether we like it or not.

For instance, take into account what CNNMoney.com has to say about Fannie and Freddie’s increasing risks, from an article written last month (4/21/08):

Wagner pointed out that at the end of January, 82% of all mortgages in the U.S. were backed by one of the firms, up from only 46% in the second quarter of 2007.

Fannie and Freddie primarily back so-called conforming loans, those made to borrowers with good credit and large down payments. But even limited exposure to subprime loans hasn’t stopped them from running up huge losses as home prices tumbled and foreclosures soared.

And Fannie and Freddie’s role in the mortgage and real estate markets is likely to grow, as Congress recently allowed them to back larger mortgages, up to $729,750, up from the previous limit of $417,000.

The Office of Federal Housing Enterprise Oversight (OFHEO), which regulates both firms, also recently lowered the capital requirements for Fannie and Freddie in an effort to pump $200 billion more into the credit markets.

The new loan limits will increase the risks and losses for Fannie and Freddie, said Wagner and other experts.

The high priced markets where homeowners and buyers need larger loans are now the ones seeing steep home price declines. And the default rates on larger loans are greater than the smaller loans that had previously been the core of their business.

In regards to those conforming loans and Fannie and Freddie being able to now back larger mortgages, in correlation to Bush’s “Stimulus Package,” I think it’s imperative to see who really benefits from the stimulus checks, and why the problems that Fannie and Freddie are facing now have the likelihood of spinning out of control into a trillion dollar disaster.