Freddie Mac is losing money from bad loans it backed, many of them before the housing market went bust. It had $118 billion in bad loans at the end of June, up from $103.4 billion at the end of last year. It owned more than 62,000 foreclosed properties in June, up from about 35,000 a year earlier.
Both Fannie Mae and Freddie Mac have both lost tens of billions of dollars during the past two years and both are asking the government to prop them up. Last week, Fannie Mae requested $1.5 billion after posting a loss of $3.13 billion, or 55 cents per share, in the second quarter.The politicians and voters may think they are bailing out homeowners and potential home owners by funding these deficits, but there are three other groups who are the major beneficiaries from these bailouts:
- The management of Freddie Mac and Fannie Mae, who all deserve to lose their jobs and a portion of their pensions.
- Home builders who would likely be even worse off without these bailouts. But I suspect the beneficiaries in these first two are small potatoes compared with those in the third group:
- Creditors of Freddie Mac and Fannie Mae. The people who bought the bonds and IOUs of these organizations correctly guessed the taxpayers would make good on the debts of these two corporations. If the taxpayers hadn't been told by politicians that the taxpayers must bail them out (and watch out for the FHA to be added to the massive subsidy list), creditors would have lost billions of dollars.
Telling creditors they do not have to do careful risk assessments, telling them that the taxpayers will cover any down-side risks, is terribly inefficient and unfair. And bailing them out this time just encourages everyone to be less careful and take too many risks in the future.