RealEstateEconomyWatch.com

Keeping Freddie and Fannie solvent has cost taxpayers six times as much as the homebuyer tax credit and, depending on the economy, could just about equal the cost of mortgage interest deduction over the next two years, according to projections released yesterday by the Federal Housing Finance Administration.

FHFA reported Fannie Mae and Freddie Mac have drawn $148 billion from the

Treasury Department since they were taken over in September 2008.  Cumulated costs are projected to range from $221 billion to $363 billion through the third quarter of 2013.  The tax credit, from 2008 to 2010, cost a total of $23.5 billion in lost revenues, though final numbers aren’t yet in. The mortgage interest deduction costs the Treasury about $130 billion a year in lost revenues.

Credit-related expenses, particularly the provision for credit losses, are the primary driver of projected Treasury draws across all three scenarios. Projects for Fannie Mae’s credit-related expenses vary by $85 billion Freddie Mac that increase amounts to $28 billion. Thus $113 billion of the projected $142 billion difference in Treasury draws scenarios is directly related to credit-related expense projections.

Home price changes have been the major driver of credit losses at the two companies.  The wide range of possible future paths exist for house prices at the national and local levels. Given the high level of uncertainty about overall economic conditions in general and the U.S. housing markets in particular, FHFA hired Moody’s to project three house price paths ranging from a second deep recession to a stronger near term recovery.  In the worst case scenario, prices fall 45% to a trough in the first quarter of 2012 and recover only 11 percent by Q3 2013.  In the best scenario, predicated on recent increases being sustained, prices increase 5 percent from 2009 to Q3 2013.

Even under the best scenario, costs to the taxpayers would still grow by $73 billion over the next two years. That’s more than twice what we spend on the war against drugs each year and three times what the Home Affordable Modification Program will cost.

The FHFA projections make it clear that the Federal government, through its exposure to the risk incurred by Fannie Mae and Freddie Mac, has much more at stake in the recovery of the nation’s housing markets than any other private or public sector entity.