Fannie, Freddie overhaul could cost $685 billion

Source: The Wall Street Journal

The total cost to rescue and then overhaul mortgage giants Fannie Mae and Freddie Mac could reach $685 billion, according to estimates published Thursday by Standard & Poor's.

Fannie and Freddie have already cost taxpayers nearly $134 billion, but S&P analysts said Thursday that the government could ultimately be forced to inject $280 billion into the firms because of a slowdown in the housing market.

Fed's Hoenig: Commercial, Investment Banking Should Be Separate. Access thousands of business sources not available on the free web. Learn More .Any entities that might replace Fannie and Freddie would need new start-up funding that would go beyond the money already committed.

A consensus of academics, industry officials and investors has coalesced around the idea of using the government to provide explicit guarantees for securities backed by mortgages that meet certain standards. Tough questions loom over how those guarantees would be structured and priced and what entities would provide them.

Analysts estimate that it would cost an additional $400 billion to sufficiently capitalize any entities that would take the place of Fannie and Freddie. Those capital levels could be lower, at around $225 billion, if the government were to retain ownership in any surviving entity.

"As it stands now, we believe that addressing the [companies'] problems is likely to be an expensive repair job for U.S. taxpayers," wrote S&P analysts Daniel Teclaw and Vandana Sharma.

While mortgage delinquencies have eased in recent quarters, analysts warned that high unemployment, a weak economy, and a sluggish housing market could prompt costs to rise "substantially" over the next year. "It's no secret that a better economy would help ease the [firms'] predicament," the report said.

The S&P loss estimates are higher than those made last month by the firms' federal regulator. The Federal Housing Finance Agency said that the taxpayer tab for the companies is on pace to reach $154 billion under the current home-price forecast. If the economy enters a double-dip recession and home prices fall more than 20%, the cost to taxpayers could reach $259 billion.

The government took over the troubled housing-finance giants two years ago through a legal process known as conservatorship. The Treasury has promised to inject unlimited sums through 2012 and nearly $300 billion after that in order to maintain a positive net worth and to avoid triggering liquidation.

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