Freddie and Fannie are Slow Learners

Freddie Mac announced that, come this September, it will no longer back interest-only mortgage loans. This is good news but raises two questions. First, what took Freddie took so long to pull the switch? Second, when is Fannie Mae going to follow suit?

Let’s recall that taxpayers bailed out Freddie and Fannie, both of which were incompetently managed by folks who assumed their positions by being political insiders. Through 2009, $111 billion in taxpayer dollars had been sent to prop up Freddie and Fannie. The government then announced that it would send an unlimited amount of additional support to handle losses expected to hit $170 billion. Previously, there had been a $400 billion cap on aid. (Source) It seems that $400 billion just doesn’t buy what it used to.

It also seems that the government is slow to learn that pumping more taxpayer money into the real estate bubble is not working out so well. The foreclosure rate in February 2010, although down 2% from January, was still 6% greater than in February 2009. This was the 50th consecutive month of year-over-year increases in foreclosure activity. (Source) What is our real estate economy gaining from all of our taxpayer money being thrown down a rat hole? I’m not seeing a reasonable return on taxpayer investment. The real benefit has been to people who were able to buy homes at declining prices, including short sales and foreclosures. That would have happened all by itself.

This brings me back to Freddie’ interest-only loan announcement. It was apparent to everyone but Freddie and Fannie that a high percentage of interest-only loans were taken out by borrowers who had poor cash flow and over-borrowed to buy something they really couldn’t afford. Not surprising, the delinquency rates for interest-only loans were almost three times higher than for a conventional loan. Freddie said it had actually begun “phasing out” interest-only loans last year, after “big losses” on such loans the three prior years. Wow – it took a mere three years to react!

Now Fannie – they are still thinking about the problem:

Fannie Mae, too, has announced huge losses on interest-only mortgages, but a spokeswoman would not say whether the company might shut off these loans.

(Source: Mortgages – Less Interest in Interest-Only Loans.)

Let’s see: “Huge” losses on risky loans, now propped-up with billions in taxpayer money. What other input is Fannie waiting for?

Do you want your taxes used to back high-risk loans having an established track record of huge losses?

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