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Fannie-Freddie Bailout: $148B and Counting

Second-quarter results from Fannie Mae and Freddie Mac paint a dark picture for the firms' near-term profitability.



) -- Second-quarter results from

Fannie Mae



Freddie Mac


paint a dark picture for the firms' near-term profitability and for an eventual payback of taxpayer funds.

On Monday, Freddie Mac reported a net loss of $6 billion, or $1.85 per share. It continued to build loan-loss reserves even as big banks like




Bank of America



JPMorgan Chase



Wells Fargo



U.S. Bancorp


saw benefits from reducing

the amount of cash held against bad debt. Credit losses climbed and its delinquency rate rose, mainly because of problem loans originated during the subprime bubble of 2005 to 2008.

Freddie Mac's conservator will request an additional $1.8 billion from the Treasury Department to keep its balance sheet in the black.

Freddie's results follow a similarly dour report from Fannie Mae last week. Fannie reported a net loss of $3.1 billion, or 55 cents per share, and will need another $1.5 billion from the Treasury. Its credit metrics were slightly better than its mortgage-finance twin, but warned that financial results will be "negatively affected" by bad loans acquired during the subprime bubble and that related expenses "will remain high in 2010."

The Fannie-Freddie bailout is soon to top $148 billion and, unlike

American International Group's


, it stands little chance of being repaid. While AIG topped the bailout list with a one-time height of $182 billion, the firm has shaved the total down to under $70 billion, with a big chunk set to be repaid by year-end.

Looking at the delinquency trends of Fannie and Freddie's loan books, it's clear the mortgage-finance giants aren't near the end of the loan-loss tunnel. That's especially true if the economy - and housing market - remain on shaky ground.

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The default rate on loans originated in 2006 is nearing 5% for Fannie Mae, while the portion of Freddie Mac's 2006 loans that succumbed to foreclosure or short-sale is approaching 4%. That might sound meager, except when considering that the same statistics for pre-2005 vintage loans range from 0.5% to just above 1%.

Within all the negativity sprinkled throughout the two reports, there was a faint silver lining: Loans originated over the past year and a half are doing remarkably well. Default rates are barely existent and delinquency rates are a sliver of a percent.

Just 0.4% of Freddie Mac's 2009-vintage loans are going bad and none of its 2010-vintage loans are suffering. That's largely because of stricter underwriting standards being enacted by the banks and enforced by Fannie and Freddie.

Still, after having accepted nearly $150 billion in taxpayer funds, with losses continuing to accrue and no repayment plan in sight, it's hard to look at their results in a positive light. In an ironic twist, the dividends paid on the Treasury's preferred stock for the quarter totaled $3.2 billion -- only $100 million less than what the two firms are requesting to make their balance sheets whole.

In other words, taxpayers are funding their own dividends and, as Freddie Mac pointed out, the dividends are helping to keep the company unprofitable.

Although the funds "permit the company to remain solvent and avoid receivership," Freddie said in a statement, "the resulting dividend payments are substantial and the company does not expect to earn profits in excess of its annual dividend obligation to Treasury for the indefinite future."

-- Written by Lauren Tara LaCapra in New York


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