The way it works right now, the US Government, and thus also US citizens, can’t win economically, it can only lose, by continuing to make additional capital contributions to fund the continuing massive annual losses of Fannie and Freddie. When you have no upside, but certain downside, you clearly have to change the situation.
I am not a lawyer so I don’t know legally how best to do it, but after researching these two companies in depth, let me give a quick overview of the steps I think should be taken, and where we should end up to best change this horrible economic situation with Fannie and Freddie, that has wreaked havoc on the US economy, and on US job creation.
First, I think that the US Government, or some US Government Agency, should now acquire, at a net purchase price at net fair market value, all of the assets, and assume all of the liabilities, of both Fannie Mae and Freddie Mac.
Second, I think the US Government should write down the interest rates significantly on all of the mortgage loans it acquires from Fannie and Freddie.
Third, for any homeowner of any underwater, or a bit above water, mortgage loan, who agrees to it, I think the US Government should write-down the home mortgage it acquired to somewhere in the range of 80% or 90% of the appraised value of the home.
Fourth, I think perhaps 20 to 50 new independent privately-held, or to be set up as independent new publicly-held, companies, as well as any existing small bank, should be permitted to each acquire from the US Government, at a shade below fair market value, a percentage that in the aggregate initially totals say 10% of the mortgage loans initially held by the US Government. Thus, the US Government should initially retain say 90% of these home mortgages.
Fifth, over time, the US Government should sell the additional 90% of these mortgage loans to these 20 to 50 companies, or to any small bank.
Sixth, the US Government will retain all the liabilities of both Freddie Mac and Fannie Mae, pay interest on them, if any, based on their contract terms, and eventually liquidate them based on their contract repayment terms. The US Government also has the opportunity to liquidate the obligations early by buying them in the open market.
These actions will spur substantial US economic growth, and US job creation. There will be substantially more income in US consumers hands that can be spent in the US economy. Also, the presently low consumer confidence will increase precipitously.
And when I do the math, any fair CBO scoring should yield a very positive net cash inflow to the US Government over the next 10 years, and on to infinity.
The massive continuing losses of Fannie and Freddie, which the US Government and thus also US citizens are funding, would be stopped.
Let me show how large these Pretax Losses of Fannie and Freddie have been in the most recent 5 years, since 2007.
……………..Fannie…...Freddie…....Total
…………….......(millions of dollars)…….
2007.......(5,147).....(5,977)....(11,124)
2008.....(44,570)...(44,564)....(89,134)
2009....(73,007)...(22,384)....(95,391)
2010.....(14,100)...(14,882)....(28,982)
2011*....(14,539)....(6,247)....(20,786)
Total...(151,363)...(94,054)..(245,417)
* 9 Months September 2011
Yeah, that’s $245 bil of Pretax Losses in the past just less than 5 years.
Also, Fannie Mae has incurred Total Derivative Losses, which have been reflected in its Pretax Losses or Pretax Income, of $71.9 bil in the past 10 years. Freddie Mac has generated Total Derivative Losses and Costs of $50.7 bil in the past 8 years. And these Derivative Losses occurred in every year for each of these two companies.
