Continuing Mortgage Woes

The stock market may be leveling out for now, but as the New York Times reports today real estate prices continue to plummet. Now there are new concerns about mortgage backers Fannie Mae and Freddie Mac. These corporations were created by Congress but are privately owned, and in recent months they have been providing some stability to the shaky mortgage market. Now there are new concerns that Fannie and Freddie do not have enough cash on hand to secure their investments and have been using questionable accounting practices in an effort to satisfy shareholders.

Because Fannie Mae and Freddie Mac are independent of the government, no taxpayer funds are currently obligated in any collapse of these institutions, but given their importance in the mortgage market, it is unlikely the Fed would just stand by. As Charles Duhigg, author of the Times article, put it: “ if Fannie or Freddie fail, taxpayers would probably have to bail them out at a staggering cost.” That phrase “staggering cost” is more than a bit worrisome. The graphic accompanying the Times article (see below) shows that Fannie Mae’s liabilities alone include $2.1 trillion dollars in mortgage guarantees and another $800 billion in outstanding debt. Freddie Mac holdings are similar. Yikes!

So, we are not out of the woods yet, and other shoes may drop before the subprime mess bottoms out.