Fannie, Freddie Could Cost $389 Billion

Moneynews (Link) - Julie Crawshaw (June 21, 2010)

For all the focus on the historic federal rescue of the banking industry, it is the government�s decision to seize Fannie Mae and Freddie Mac in September 2008 that reportedly is likely to cost taxpayers the most money.

So far the tab stands at $145.9 billion and rising, the New York Times reports.

The Congressional Budget Office has predicted that the final bill could reach $389 billion.

Some analysts even estimate the total may reach $1 trillion, which Sean Egan, president of Egan-Jones Ratings, recently told Bloomberg is �a reasonable worst-case scenario."

Egan told Bloomberg that the final tally could hit $1 trillion assuming a 20 percent loss on the companies' more than $5 trillion in loans and guarantees, similar to what other big mortgage companies, like Countrywide Financial, suffered.

The two government-sponsored enterprises (GSEs) now own more houses than there are in Seattle and are foreclosing on homeowners whose mortgages they guaranteed, the Times said.

Fannie and Freddie maintain the houses for a while, then resell them at a huge loss.

In many cases, they also underwrite the new mortgage for the new buyer, generating even more bank fees taxpayers must ultimately absorb.

On average, they recoup less than 60 percent of the amount borrowers failed to pay.

Costs for selling a house generally are usually about $10,000. Fannie and Freddie hire people to clean up the foreclosed homes inside and out, replace missing appliances and maintain the properties until they are sold.

The grass-mowing bill alone is more than $10 million per month; All told, the GSEs spent more than $1 billion on upkeep last year.

�We may be behind many loans on the same street, so we believe that it�s in everyone�s best interest to aggressively do property maintenance,� said Chris Bowden, the Freddie Mac executive in charge of foreclosure sales.

Short sales are a growing alternative to foreclosure.

In the past, a short sale was an unusual alternative, one real estate agents rarely presented to sellers, realtor Erek Gass told the York Daily Report.

�Now, they are common because of the devaluation of the housing market,� Gass says.