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How Will the Fannie and Freddie Takeovers Affect U.S. Debt?

Name: Davidson Dodd
City & State: Seattle, Wash.

Question: Can you explain how the U.S. government's take over of Fannie Mae and Freddie Mac affect interest on the debt now and in coming years?

Paul Solman: No. Actually, I CAN explain, but I think you want me to estimate the cost, and that I cannot do. Why? Because there's no way of even knowing if the takeover will eventually cost money, or actually wind up MAKING money for taxpayers. In short, the impact on our national debt -- and thus on the interest we pay on it -- could be either negative or positive.

How so? you may ask.

Well, Fannie and Freddie buy home mortgages, insure and resell them: MBS, or mortgage-backed securities. Sometimes, they hold onto the mortgage securities themselves as an investment.

If the underlying mortgages go up in value, the Fannie and Freddie portfolios are worth more. Remember, they were making big PROFITS just a few years ago. Any FUTURE profits, like "this land" in Woody Guthrie's song, are made for you and me.

-- Posted October 28, 2009 | Comments (0) | Permalink