Will Your Tax Dollars Cover Fannie Mae’s $7.6 Billion Loss?

Fannie Mae has struggled to stay afloat financially since its first government bailout several years ago–but during third quarter 2011, the mortgage giant revealed it lost an astounding $7.6 billion and now needs additional federal assistance to avoid falling further into debt.

Government bailouts are technically paid through tax dollars, so if Fannie Mae is assisted as requested, could taxpayer money be directly impacted?

First Fannie Mae Bailout Wasn’t Enough

Fannie Mae’s recent financial troubles began with the financial crisis of 2008. The government-sponsored mortgage servicer, along with its counterpart Freddie Mac, involved itself in the world of mortgage-backed securities.

While both companies had been involved in these toxic assets in the 1970s and 1980s–buying home loans from banks and other lenders, packaging them with bonds with a guarantee against default then selling them to investors around the world–they continued on even when lenders were issuing problematic adjustable rate mortgages and balloon mortgages to unqualified borrowers who were destined to default.

Between 2008 and 2009, millions of borrowers did indeed default, and most companies that took part in mortgage-backed securities, along with other toxic assets like collateralized debt obligations and credit default swaps, lost millions or even billions of dollars.

However, unlike many other companies, Fannie Mae and Freddie Mac play enormous roles in the housing industry. Currently, the companies own or guarantee about half of all mortgages (nearly 31 million) in the U.S. and back nearly 90 percent of new mortgages over the past year. That means the government simply can’t let them collapse.

The government has already granted both Fannie and Freddie billions in bailout funds. The Fannie Mae bailout alone has reached $112.6 billion–the most expensive bailout of a single company. However, recent financial problems have deepened Fannie Mae’s losses, resulting in the servicer asking for even more money to continue functioning.

Losses Deepened by Low Interest Rates, Declining Home Prices

Since the first Fannie Mae bailout, it has managed to continue a “business as usual” approach, though it functions on a weaker foundation than in the past. This foundation nearly crumbled in the July-September quarter of this year when the company lost $7.6 billion.

It’s no secret the housing market has been struggling since 2008. While it has been taking baby steps toward repair, record foreclosures, mortgage lender scandals and declining home values have slowed any chance of full recovery.

These issues, along with record-low mortgage interest rates, have had a huge impact on Fannie because the company is having a hard time turning a profit.

To make up for the company’s third-quarter losses, Fannie is asking the federal government for a $7.8 billion bailout. This does not include $6 billion in extra aid requested from Freddie Mac at the beginning of November.

In total, the companies have already received about $169 billion to keep them from folding. The government estimates that if it gives them additional bailout money, the companies could owe taxpayers in the ballpark of $220 billion by 2014. So what does this mean for taxpayer money, the likely source of bailout funds?

Will the $7.8 Billion Bailout be Funded by Taxpayer Money?

Many say Fannie Mae will owe taxpayers $7.8 billion in addition to the billions already owed if a bailout is granted, since tax dollars will fund it.

But would a bailout of this magnitude actually have a direct impact on taxpayers?

Actual bailout dollars won’t come out of each taxpayer’s bank accounts directly, especially since bailout recipients are typically required to pay back the money themselves. But over time, if losses are strongly felt, personal income taxes could increase or entitlement programs such as Medicaid could see cutbacks.

The likelihood of significant tax increases happening in the near future, however, is slim. Currently, lawmakers are taking steps to lower taxes, especially payroll taxes that have been discounted by 2 percent in 2011.

The Obama administration is also working to overhaul Fannie and Freddie and at the same time decrease the government’s role with them so that federal funds won’t be tied into the mortgage system.

This huge step that would remake decades of federal policy aimed at getting Americans to buy homes and could result in an increase in the cost of home loans. It could also ensure  future taxpayer money wouldn’t be used to bail out these companies when facing financial trouble, forcing them, instead, to rely far more on private money.