In 2003, Rep. Barney Frank (D-MA) famously denied that "the Federal Government is obligated to bail out people who lose money in connection" with Fannie Mae and Freddie Mac:  "There is no guarantee, there is no explicit guarantee, there is no implicit guarantee, there is no wink-and-nod guarantee.  Invest, and you are on your own."

We now know that Rep. Frank was either ignorant or lying, but are most Americans aware that the U.S. government is now responsible for all of Fannie and Freddie's financial obligations, and that these obligations amount to nearly $7 trillion worth of debt and guarantees?

The mainstream media typically represents the bailout of Fannie and Freddie as a relative bargain, costing the Federal government "$130 billion and counting" as of 2011 (NPR) and a decade from now perhaps only "$28 billion" (The Economist).  Yet these figures only represent the amount of money the Treasury has invested to keep Fannie and Freddie solvent, minus the profits the GSEs have paid back to the Treasury. They do not include the financial obligations of the GSEs, for which the U.S. government is now entirely responsible.

As the Associated Press reported in 2008, "with the government takeover of Fannie Mae and Freddie Mac, U.S. taxpayers now essentially own the bulk of the nation's mortgage market." In other words, when Fannie and Freddie went into conservatorship in September 2008, the two GSEs became (in the words of the Congressional Budget Office) "governmental," and this "effectively made the government's backing of their debt securities and [mortgage-backed security] guarantees explicit" (see p. 3 and p. vii of the 2010 CBO report).

So what is the potential damage?

As of September 2008, Fannie and Freddie guaranteed roughly $3.5 trillion worth of mortgage-backed securities.  The present figure must be significantly higher, because the GSEs, along with Ginnie Mae and the Federal Housing Administration, have purchased or guaranteed nearly every mortgage issued in the United States since late 2008 when the GSEs went into conservatorship.  These agencies backed "nearly 97% of U.S. mortgages in 2009," "96.5% of all newly originated mortgages" in the first quarter of 2010, and "nine out of every ten home loans" in 2012. 

This amount does not include the current debt obligations of the two GSEs, which are now also the responsibility of the U.S. government. As of 2012, Fannie Mae's debt securities amount to $652 billion and Freddie Mac's amount to $586 billion, for a total of more than $1.2 trillion in outstanding debt.  Taking together the size of the GSE's outstanding guarantees and current debt obligations, $5 trillion is a reasonable estimate of the amount for which Fannie and Freddie (and thus American taxpayers) are now responsible.

To make matters worse, the Housing and Recovery Act of 2008 only permits the Treasury to provide Fannie and Freddie with unlimited capital for operating expenses through December 2012.  After December 31," as NBC News recently reported, "Fannie Mae's bailout will be capped at $125 billion and Freddie Mac will have a limit of $149 billion." The GSEs owed the Treasury a combined $143 billion as of August 2012, so that should leave them a $131 billion line of credit starting in 2013 (they generated modest profits in the first half of 2012). Once this cap is reached, the GSEs will have to rely on investors who are willing to purchase their debt securities. It is not certain that the amount to be had from these sources will be enough to keep Fannie and Freddie operational, but neither the Obama administration nor Congress has been willing to touch this issue before the election.

So what does the future hold for Fannie and Freddie, and for us taxpayers? The 2010 CBO report on Fannie and Freddie considers three possibilities for the future of the secondary mortgage market: "a hybrid public/private model ... a fully public model ... [and] a fully private model." The hybrid/public model, as embodied by Fannie and Freddie, has already been tried, and with disastrous results. It is highly unlikely that Democrats in Congress will ever accept a fully private model, as anyone who is familiar with the transcripts of congressional committee hearings involving the GSEs will attest. That leaves the fully public model, involving a complete federal takeover of the role of purchasing mortgages from banks and other mortgage lenders.

It is in this light, I would suggest, that one must understand the Federal Reserve's purchase of mortgage securities from Fannie and Freddie.  Whatever other apparent benefits may flow from these purchases, they effectively pave the way for eliminating the GSEs and nationalizing the secondary mortgage market. In a 2011 opinion piece for CNN Money, William M. Isaac and Richard M. Kovacevich propose to eliminate Fannie and Freddie and replace them with a fully private model. The first step of their plan is "Fannie's and Freddie's existing portfolio of mortgages should be sold at a rate of about $75 billion a year until it reaches zero." This could just as easily be a first step toward replacing the GSEs with a fully public model.  As I pointed out in a recent blog post at American Thinker, the Federal Reserve's decision in September to purchase $40 billion worth of mortgage securities per month from Fannie and Freddie would make it possible to purchase Fannie Mae's and Freddie Mac's entire portfolios in less than three years.  In addition, the Federal Reserve's purchase of $1.25 trillion of mortgage securities in 2008-2010 should have been sufficient to place all risky mortgages guaranteed by Fannie and Freddie into the hands of the Federal Reserve, where restitution can be indefinitely postponed if borrowers stop making payments.  With the GSE's portfolios eliminated and its toxic mortgage guarantees in the hands of the Federal Reserve, it will be possible to argue that there is little present risk involved in transforming the GSEs into permanent agencies of the federal government. 

This transformation will make it possible for the federal government to continue its policy of affordable housing for low-income home buyers and will keep demand high for new homes ... until the next time the housing market collapses, and American taxpayers once again find themselves holding the bill.