They don't know it, but taxpayers stand to lose billions as the housing bubble bursts. And in a bipartisan effort to "do something" to save the housing market, President Bush and the Democratic Congress appear set to put taxpayers on the hook for billions more.
Until now, losses in the housing world have been confined to homeowners, mortgage lenders, banks and investors in toxic mortgage securities. But by virtue of the implicit federal guarantee backing mortgage giants Fannie Mae and Freddie Mac, U.S. taxpayers may be one of the largest mortgage lenders in the world - set to lose billions, like all the others.
Between them, Fannie Mae and Freddie Mac back more than $4 trillion in mortgages. If they fail, it could force an unprecedented taxpayer-funded bailout. And they are much closer to failure than most people realize.
Some saw this coming, including presidential candidate Ron Paul. As far back as 2002, Mr. Paul - whose candidacy I'm not actively supporting - predicted the Federal Reserve would blow up the housing bubble.
Besides the Fed's low-interest-rate policy, which encouraged excessive borrowing to buy homes, its refusal to regulate mortgages gave lenders license to sell whatever mortgage products they could dream up, no matter how risky. Mr. Paul was dead-on with his prediction that the Fed was blowing a new bubble and that it would burst violently.
Another Paul prediction, that Fannie and Freddie will go bust, forcing a taxpayer bailout, remains controversial because few think the housing crash could be that bad.
But consider how vulnerable Fannie and Freddie are.
In a recent Securities and Exchange Commission filing, Fannie noted that it backs $2.6 trillion worth of single-family home loans. Underneath this pile of debt, the company has only $42 billion of capital. If the value of mortgages backing Fannie's debt falls a few percentage points, the company's capital could be wiped out. And because of the implicit government guarantee backing Fannie's debt, American taxpayers would be on the hook for whatever debt Fannie couldn't cover.
To be sure, most mortgages that Fannie backs are safe. But consider Fannie's exposure to high-risk loans: about $300 billion of stated-income "liar loans," $200 billion of interest-only mortgages, $120 billion of subprime mortgages and $330 billion of high loan-to-value mortgages.
