Taxpayers Bear Brunt of This Bailout

"Some people will say, `We had 30 years of better mortgage rates from Fannie and Freddie, so maybe this bailout is worth it,'" Reiss says. "But it is much better to design a stable financial system where there is not the possibility of a big blowup down the line."

If the bailout eventually amounts to $300 billion, as some have estimated, people will be hard-pressed to say it was a good deal for taxpayers, Reiss says.

The best estimate of the savings Fannie and Freddie have provided to homeowners over the years probably comes from a report from the Federal Deposit Insurance Corp. in 2004. It said the companies' guarantees on mortgage-backed securities cut about 40 basis points off the instruments' yields. Assuming most of this spread goes back to homeowners in the form of lower mortgage rates, then homeowners have surely benefited since the 1970s.

Based on last week's average 30-year mortgage rate of 6.37%, then presumably homeowners would pay 6.77% for the same mortgage if Fannie and Freddie weren't around, using the FDIC math.

However, testimony from the Congressional Budget Office in 2001 pointed out that not all the federal subsidies flow directly to mortgage borrowers, since shareholders in Fannie and Freddie grab some of the profits from the increased competitive advantage the two firms get from the subsidies. (Essentially, it's impossible to compete with Fannie and Freddie, since they have such low costs of capital).

The problem now is that Fannie and Freddie need more money. Both firms have gone from subsidizing the mortgage market to now being explicitly subsidized by the federal government. Treasury is extending increased lines of credit to the firms, while also pledging possible equity investments. Who pays for that? The U.S. taxpayer.