Fannie Mae and Freddie Mac have become gigantic financial black holes that the U.S. government endlessly pours massive quantities of money into. Unfortunately, if the U.S. government did allow Fannie Mae and Freddie Mac to totally implode, both the mortgage industry and the housing industry in the United States would completely collapse. So essentially the U.S. government finds itself between a rock and a hard place. Prior to the financial crisis of the last few years, Fannie Mae and Freddie Mac were profit-seeking private corporations that also had a government-chartered mission of expanding home ownership in America. But now that they have been officially taken over by the U.S. government, they have become gigantic bottomless money pits. It is hard to even describe just how much of a mess Fannie and Freddie are in. However, the unprecedented intervention by Fannie Mae and Freddie Mac in the mortgage market over the past couple of years has been about the only thing that has kept it from plunging into absolute chaos. So what does the future hold for Fannie Mae and for Freddie Mac? Well, according to one estimate, it could take another 5 trillion dollars to "fix" Fannie Mae And Freddie Mac.
Yes, you read the correctly. According to an article in the Christian Science Monitor, Fannie Mae and Freddie Mac are facing $5 trillion dollars in liabilities that the federal government is going to have to deal with one way or another....
An exit strategy could involve adding Fannie and Freddie's roughly $5 trillion in obligations, in effect, to a federal balance sheet that already includes $13.3 trillion in federal government debts. The GSE obligations would be a different animal, because those liabilities would need to be covered by taxpayers only if things went bad in the housing market.
It is hard to even put into words how much money that is. If you were alive when Jesus was born, and you spent one million dollars every single day since then, you still would not have spent one trillion dollars by now.
But Fannie Mae and Freddie Mac are not a one trillion dollar problem.
They are a five trillion dollar problem.
And if the housing market gets even worse (which it will), that figure could rise substantially.
Of course the U.S. government should have never gotten into the mortgage business in the first place, but these days the U.S. government is intervening in virtually every industry.
And don't expect U.S. government support for the mortgage industry to stop any time soon. In fact, U.S. Treasury Secretary Timothy Geithner says that the U.S. government plans to continue to play a prominent role in back-stopping mortgages in order to keep the U.S. economy stabilized.
But if the only thing keeping the U.S. housing industry from plunging into the abyss is unprecedented intervention by the U.S. government, what does that say about the overall health of the U.S. economy?
Mortgage defaults and foreclosures continue to set new all-time records even with all of this government intervention. In fact, major U.S. banks wrote off about $8 billion on mortgages during the first 3 months of 2010, and if this pace continues it will even exceed 2009's staggering full-year total of $31 billion.
Not only that, but construction of new homes in the U.S. and applications to build new homes in the U.S. both declined to their lowest levels in more than a year during July.
And things are rapidly getting even worse for Fannie Mae and Freddie Mac. Mortgages held by Fannie and Freddie are going delinquent at a very alarming pace as the Christian Science Monitor recently explained....
As of March 31 this year, 6.3 percent of mortgages held by Fannie and Freddie are either seriously delinquent or in foreclosure. Although that's down slightly from the figure three months earlier, it represents a big one-year rise (from 3.9 percent in early 2009).
An increase in delinquencies of over 50 percent in just one year?
That is not a promising trend.
If the U.S. housing market takes another big dive in the next few years, and things certainly look very ominous at the moment, what in the world is that going to do to Fannie Mae and Freddie Mac?
So what is the solution?
Well, on Tuesday the Obama administration invited prominent banking executives to offer their thoughts on the mortgage market.
So what was the consensus?
It was something along the lines of this: "Please, oh please, oh please continue propping up the 11 trillion dollar mortgage market."
So much for capitalism, eh?
When even the banksters are begging for massive ongoing government intervention you know that the game has changed.
Adam Smith must be rolling over in his grave.
But this is where we are at.
We are on the verge of a horrific economic collapse, and it is only enormous intervention by the U.S. government that is holding things together.
Fannie Mae, Freddie Mac, the Federal Housing Administration and the Veterans Administration backed approximately 90 percent of all home loans made during the first half of 2010.
So where would we be without the government?
Of course we could let the whole thing collapse and allow housing prices to eventually settle at a level where people could actually afford them, but what fun would that be?
No, for now the U.S. government will continue to endlessly spend billions of dollars to prop up a system that is artificially inflated and that is destined to collapse one way or another.
The truth is that the American middle class is slowly being wiped out and they just can't afford to pay $300,000, $400,000 or $500,000 for their houses anymore.
Without good jobs, the American people are not going to be able to afford hefty mortgages. Unfortunately, millions upon millions of middle class jobs are being offshored and outsourced every single year and they are not coming back.
There simply will never be a recovery in the housing market without jobs. But in the new global economy, American workers have been put in direct competition with the cheapest labor in the world. It doesn't take a genius to figure out that jobs are going to be taken away from American workers and given to people who are willing to work for less than ten percent as much.
So, no, the housing market is never going to fully recover. Things got dramatically out of balance over the past couple of decades, and the housing market is going to try to restore that balance regardless of what the U.S. government does.
The U.S. government can continue to throw billions (or even trillions) of dollars at the problem, but in the end the underlying economic fundamentals are simply not going to be denied.