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May 8, 2008

Our View: Mortgage bailout bears risk

The American Dream of owning a home could turn into a nightmare for taxpayers.

As various agencies of the federal government move to mitigate the subprime mortgage crisis, the ultimate price could be paid by U.S. taxpayers. A report by The Christian Science Monitor, published today in The Free Press, shows that 98 percent of mortgage loans sold by banks are backed by Fannie Mae, a company with strong links to the federal government.

Once called the Federal National Mortgage Association, Fannie Mae is not a government agency but has a mission developed during the Depression to keep housing markets stable. It is the lender of last resort for banks who don’t want to or can’t service various mortgage loans. Fannie Mae recently reported a loss of $2.2 billion for the first quarter of this year.

The organization’s public charter calls for making sure home loans remain available during good times and bad. Bad times certainly include times when housing values are falling.

Legislation moving through Congress to stave off a mortgage crisis also calls on the Federal Housing Administration to allow strapped homeowners to refinance with it at lower rates, but not before their original lender takes substantial losses. That means FHA, which is a government agency, would be taking on loans backed by collateral that has a history of losing value.

But the Congressional Budget Office says about a half-million mortgage foreclosures, or half the yearly rate, would be avoided should Congress move forward with these measures.

Unfortunately, doing something, even something this risky, is probably better than doing nothing. Lending standards at many banks around the country have been tightened. That’s been led by investors who expect the subprime crisis to continue, rendering an investment in mortgage loans highly risky.

While taxpayers are not obligated to stem the losses of Fannie Mae, experts argue the institution is too big for the government to allow it to fail. Such a failure would send shockwaves through numerous investment markets.

Without Fannie Mae’s help experts conclude the market for mortgage loans — even good loans — would dry up because investors would be unwilling to buy loans that were not backed by Fannie, FHA or some other agency that could give investors confidence.

Lawmakers are indeed urging the organizations to up their lending and refinancing to prevent further mortgage foreclosures. They even authorized Fannie Mae to guarantee “jumbo” loans of up to $730,000 in high-cost, struggling markets on the West Coast. Many have criticized the organization for not moving faster.

And mortgage experts say the involvement of Fannie Mae, if managed carefully, can insulate taxpayers for undue risk.

Stockholders of Fannie Mae, and its brother Freddie Mac, would be on the hook first if the organizations get in too deep, but the risk to taxpayers is not insignificant. A economic stimulus check will not go far if taxpayers end up paying more by the time April 15 comes around next year.

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