3 Reasons No One Wants to Talk About Fannie Mae and Freddie Mac

Last Updated May 13, 2010 10:41 AM EDT

Actually, people are talking about Fannie Mae (FNM) and Freddie Mac (FRE), but mostly in the context of how to avoid talking about them seriously until next year. In wrangling over what to include in the financial reform bill, the Senate rejected a plan to kill the troubled F siblings as they currently exist within 24 months, voting instead to officially study what to do about Fannie and Freddie.

Why the foot dragging on reforming these two taxpayer-funded financial sinkholes?

1. Too Big to Fix
The sheer size of F&F helps explain some of the inertia. Together, the Federal National Mortgage Association (Fannie) and the Federal Home Loan Mortgage Corporation (Freddie) financed or backed 70 percent of single-family mortgages last year.

To date, they have received $145 billion in government bailout money, more than AIG, Bank of America (BAC) and Citigroup (C) combined. In recent days, Fannie and Freddie reported first-quarter losses of $13.1 billion and $6.69 billion, respectively. In the same breath, each also put a hand out, requesting almost $20 billion more from the Treasury Department to continue to prop up the home-loan market.

The amounts of money lent and lost are so disturbingly large that there's an argument to be made for just avoiding the whole mess and leaving it to future senators or regulators or administrations.

2. Fannie and Freddie are better than the alternative
Yes, Fannie and Freddie are bleeding money like a rogue oil gusher. But simply scrapping them without coming up with a well-designed replacement could further weaken the residential loan market.

As Alyssa Katz explains at Housing Watch, Fannie and Freddie's numbers -- however grim -- look immaculate in comparison to mortgage holders in the private sector: Freddie's overall delinquency rate is 4.13 percent; Fannie's is 5.47 percent. Prime, fixed-rate mortgages securitized by Wall Street? 12 percent are past due.

It's the same story with foreclosures. Freddie Mac takes an average 39 percent loss on them; investment banks' servicers' loss is more like 74 percent.

3. F&F laundering money for the banks?
Fixing F&F may not serve everyone's short-term interest. In Ignoring the Elephant in the Bailout, Gretchen Morgenson of the NYT suggests F&F may be overpaying for the mortgages it buys from banks and other mortgage lenders as a "back-door bailout'' of US banks, which are Treasury's immediate priority.

Morgenson quotes Dean Baker, co-director of the Center for Economic and Policy Research: "If [F&F] are deliberately paying too much for mortgages to support the banks, the government wants them to be in a position to keep doing that, and that would mean not doing anything about their status until further down the road."

No wonder these high-maintenance mortgage sisters aren't exactly the talk of the town.

Image from Flickr