From the Wall Street Journal's Developments blog:
It turns out that Fannie Mae and Freddie Mac, already becoming the most expensive legacy for taxpayers from the financial crisis, aren’t just too big too fail. As my column in Monday’s WSJ explains, they’re also proving too tough to reform.
Here’s a closer look at five common questions about what’s happening with—and what’s next for—Fannie and Freddie:
1. Why doesn’t the financial-overhaul bill address Fannie and Freddie?
The Obama administration says it’s too soon to take action to address the future of the housing-finance giants because markets are still fragile, and others have said the bill is already too complex without Fannie and Freddie in the mix.
Revamping the housing-finance giants, which own or guarantee around half of the nation’s $10.3 trillion in home mortgages, was never going to be easy. But the fact that, together with the Federal Housing Administration, the companies guaranteed 96.5% of all new mortgages last quarter has made the challenge only greater.
During the debate on financial-overhaul legislation, Republicans proposed measures that would have wound down the companies and limited the amount of further government aid. But the amendments didn’t specify what would take the place of Fannie and Freddie.
Both parties are “ignoring the issue,” says Lawrence White, an economics professor at New York University. Yes, markets may be too fragile for action now, but he says a plan now would give markets time to prepare for the future.
2. Why are Fannie and Freddie still losing money?
The companies have taken $145 billion in handouts, including $19 billion this quarter, from the U.S. Treasury so far, and that number could rise as foreclosures mount. Each quarter, as more mortgages go delinquent, Fannie and Freddie have to set aside more cash in reserve to cover losses if those loans end up defaulting and the homes they’re secured by go through foreclosure.
Nearly all of those defaults are coming from loans that the companies made during and immediately after the housing boom. Loans today have significantly tighter lending standards and should be profitable.
While losses could continue for several quarters, there are signs that delinquencies may have peaked during the first quarter. Fannie Mae and Freddie Mac each said that the number of its loans that were seriously delinquent fell in March, from February....MORE