"Those dividends are specifically designed to compensate taxpayers and make sure taxpayers are paid back," Asst. Treasury Secretary for Financial Institutions Michael Barr told me. They will also keep Fannie and Freddie from ever turning a profit. Barr wanted to make sure I knew that under the "baseline" or current stay-the-same scenario, nearly 90 percent of the losses have already happened. We're only looking at about $19 billion more if the housing crisis ends quickly.
Then there's the bad scenario, where house prices would fall further and taxpayers could have to cough up $124 billion more. I asked Barr which he thought was most likely, and he politely informed me that he doesn't do prognostications or projections or whatever you want to call them. When I tried to change the subject to that nasty mortgage securitization issue, since I did have him on the phone, he continued to toe the Administration's line that, "based on evidence thus far there are no structural flaws in the system of mortgage securitization," an issue that could cost the big banks billions of dollars or at the very least a wildly hefty litigation bill.
"I don't put a lot of credence in any of the numbers," Barr added with respect to recent screaming headlines of multi-billion dollar bank losses from loan"put-backs." [That's where investors (including Fannie and Freddie) force the banks to buy back bad loans that may have been misrepresented during securitization.]
While Mr. Barr doesn't want to predict the future of home prices, a firm called Clear Capital today put out an "Alert." They usually do a monthly home price report which mirrors very closely the results of the more widely-followed S&P/Case-Shiller Home Price Index. Today's report runs the numbers through October 12th, about half the month, and finds a precipitous recent drop, leading to a 5.9 percent drop in home prices over the past two months. Granted, it's mostly the tax credit hangover, but far worse than was expected.
"The reason this is so scary is that we have a very severe price decline in two months, added on top of the robosigning issue that has a lot of people scared, and going into the winter months, which is classically the slow time for real estate, and prices are generally stressed," says Clear Capital's Kevin Marshall. "Put those three things together for Q4 2010 and Q1 2011, and we are in for a rough ride."