'Stealth' Housing Bailout: It's Bigger Than You Think

With Congress on the eve of passing a historic bill that would give the Treasury a blank check to lend money to Fannie Mae and Freddie Mac, it’s worth looking at how much money the government has already pumped into the system during the housing crisis.


The numbers are staggering and likely to get much larger. What we have here is, through a variety of programs, a stealth bailout where more than a trillion dollars of taxpayer guarantees have been extended to the housing market, both to keep it going and to clean up the mess from the past.

I looked at the changes over the past year to the balance sheets of four governmental and quasi-governmental agencies—the Federal Reserve, the Federal Home Loan Banks, the Federal Housing Administration and Fannie Mae and Freddie Mac. The objective was to see how much additional financing they have provided to the housing market. The total: $1.43 trillion.

I’ll walk you through the numbers in a minute, but it’s worth pointing out this is not an actual expenditure of taxpayer money—not yet anyway. It’s a tally of how much financing those organizations have put out into the marketplace that's largely related to the housing crisis. The costs to the taxpayer will be directly related to how bad the housing crisis gets from here, how much of a buffer in the way of capital these organizations have to absorb losses, and how good their underwriting is for the new loans or collateral. Which is to say: We can count the exposure, but we can’t yet tally the losses.

The Fed: $446 billion

A simple way to look at how much financing the Fed has pumped into the housing market is to look at the change in the weekly balance sheet. What you’ll see immediately is that the total amount of Treasurys on its books has fallen by $311 billion compared with a year ago. This has been replaced by $150 billion in collateral from the Fed’s Term Auction Facilities, in which it is taking in a variety of collateral, much of which is presumed to be housing-related. Another $29 billion is on its books in the form of collateral from Bear Stearns, which greased the wheels of that firm's buyout by JPMorgan Chase. Add to that $14 billion in discount window lending to banks and $88 billion in repurchase agreements, which the Fed has always done, but not in such great amounts or for such periods. These repos are now from 15 to 90 days. There’s another $65 billion in swap lines to the European and Swiss central banks that designed to allow European banks to borrow dollars and finance their illiquid assets. (See the accompanying video for more.)

We should also count the $100 billion of Treasurys the Fed loans out through another new facility designed to pump liquidity into the market. Through that system, the Fed loans Treasurys and takes in collateral—again, some of it housing-related. The Fed doesn’t debit its Treasury line item for this because it says it’s only loaning out the securities, but those loans are backed up, in part, by a variety of assets, including some from housing.

So the total for how much new financing the Fed has made available to markets: $446 billion.

Fed officials have said they've never lost a penny on such lending in the past and they deal only with sound financial institutions. (If you’re not sound, you can’t borrow from the Fed, and staying current with the Fed is a good way to stay sound.) They add that they have protection through haircuts or discounts, so that $100 of bonds could get only $95 of financing. In addition, to some extent, as the Fed has made more financing available to real estate-related securities, it’s made less financing available elsewhere. But overall, it’s opened up the spigots to finance real estate in a big way.

Note that the Fed won’t provide values of the types of collateral it holds against its loans.

Federal Home Loan Banks: $274 billion

This is an easier calculation than for the Fed. The 12 Home Loan Banks provide financing to its 8,000-plus banks that, in turn, is used to fund mortgages. The amount of what FHLB calls “advances” to member banks has risen by $274 billion, to stand at $914 billion for the second quarter of 2008.

The FHLBs say existing capital and member banks will absorb losses if they occur. But there is an implicit government guarantee, on that Treasury Secretary Henry Paulson reiterated recently. The legislation in front of Congress allows Treasury to increase lending to FHLB.

Fannie Mae and Freddie Mac: $621 billion

Another easy calculation. Just go look at the balance sheets of Fannie and Freddie and look at the increase in outstanding mortgage-backed securities. That number tells you how much more mortgage guarantees the two giants have out there. Combined, the figure is up by $582 billion. Add in a $39 billion increase in Fannie Mae’s portfolio to get to $621 billion. But note that this is comparing 2007 with 2006. The numbers are almost certainly larger now.

Federal Housing Administration: $90 billion

Officials there tell me they have added $90 billion or so of insured loans since October. Moreover, they have added loans from people they formerly did not lend to: Now they're doing refinancings and funding delinquent borrowers, folks they previously wouldn't deal with.

They say the phone is ringing off the hook as subprime borrowers look to FHA to help them get out of onerous loans. This is a place where there could be real losses, and where losses are expected to grow. The legislation in front of Congress authorizes up to $300 billion of FHA lending.