I’m not too concerned about raising the conforming limit for Fannie and Freddie. These are still private enterprises, and they have pretty good incentives not to guarantee junk loans. They’re trying to make a buck first, and appease the politicians second. Sure, if they fail, we’re on the hook for their losses, but I bet they won’t fail.
I bet you’re wrong. According to their latest 10-Q (filed last November), Fannie has guaranteed $2 trillion in mortgages and owns $700 billion. All this on $44 billion in capital. Does this look like a sound balance sheet to you?
The only incentive the Fannie and Freddie CEOs have are to make short-term results look good through the fees generated by mortgage originations. They have virtually no incentive to look at the long-term likelihood of payback on these loans as that won’t affect their bonuses for the next quarter.
My guess is that if the Fannie and Freddie mortgage portfolios were marked to market, they would both be insolvent.
Search for “MBS held by third parties” on that page to see how bad it is. In that little section you can see how enormous their mortgage book of business is and how little capital they have. These guys are goners without additional captial infusions.
I’d give you a link to Freddie Mac’s latest quarterly filing, but I can’t find any:
