Freddie Mac and its counterpart, Fannie Mae, were originally created in the beginning of the last century to strengthen the nation's real estate economy. Now, taxpayers are being forced to return the favor with a massive bailout of these two institutions. The economy is worsening, and Freddie Mac needs quick cash.
Freddie Mac has gotten about $14 billion from the fed bailout to help offset more than $25 billion in losses that it incurred during the third quarter of 2008. The capital is the first taxpayer infusion of cash into the coffers of Freddie Mac since the government took over the twin mortgage finance agencies a couple of months ago.
Losses due to toxic mortgage investments and lax underwriting standards at Freddie Mac are so bad that, in 2008 alone, they've virtually erased all the profits that the company amassed this entire decade. The company's stock, which was once considered a blue chip that traded around $70 a share last year, can now be bought for pennies.
Bailout a long way to go
Sadly, the $14 billion may be just a down payment on the bailout funds taxpayers will eventually fork over to Freddie Mac. When it and Fannie Mae were taken over, the Fed pledged as much as $200 billion in rescue help. As foreign credit markets and the domestic real estate markets continue to suffer, Freddie Mac is being asked to assume even more bad mortgages from lenders, in order to salvage the mortgage lending community. It has indicated that the economic downturn is expected to generate a powerfully crippling second wave of problems as house prices fall, unemployment rises, and consumers find it harder than ever to keep current on their mortgages.
Please, Mr. Treasury, may I have some more?
Adding insult to injury is the fact that Freddie Mac is also involved in a disagreement with J.P. Morgan Chase that could prove costly. The latter took over the failed Washington Mutual-which had sold off a massive portfolio of bad mortgages to Freddie Mac. Now it seems that Morgan is unwilling to buy those losing loans back from Freddie Mac. If it's unable to get rid of them, Freddie will probably have no choice but to ask for more bailout money from the Treasury in order to shore up its balance sheets. All of this adds up to a terrible outlook that just keeps getting worse.
Many analysts think that Fannie Mae and Freddie Mac may need more than the $200 billion earmarked in the original bailout package. With all sorts of hands now reaching out to the central bank for help-including the big three automakers and various state governments-the burden on taxpayers is beginning to look downright crushing. Until the problems at Fannie Mae and Freddie Mac are fixed in order to set the real estate market straight, there's little hope for an economic recovery.