Government Grossly Underestimates Fannie and Freddie's Capital Needs

The U.S. “Office of Management and Budget” released a grim report on the capital requirements of Fannie Mae (FNM) and Freddie Mac (FRE): at least $92.2 BILLION next year, alone.

The one thing we know for certain regarding any and every budget projection for the U.S. government which looks out even a year in advance is that it will grossly understate reality. Based on a myriad areas of flawed “analysis” and fraudulent “statistics”, a much more realistic ball-park assessment would be to triple that estimate, meaning that these financial black-holes will require more than a quarter of a TRILLION dollars in 2010, alone.

The first area where the government is grossly underestimating the magnitude of losses is regarding the carnage which will be experienced in the U.S. housing market through just the mortgage-resets. As reported in “U.S. Mortgage Crisis to get MUCH worse in 2010-11”, the housing market is nowhere near a peak in foreclosures (with another new, all-time record just set in April), as a graph from that earlier piece demonstrates unequivocally.

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By the time 2010 begins, the U.S. housing market will have fallen in aggregate, by an average of 40%, and will still be plummeting downwards due to massive over-supply and a continuing deluge of “short-sales” and foreclosure sales (see “A Revealing Look at U.S. Housing Propaganda”). Few, if any of those with mortgages reseting in 2010 will have any equity in their homes. By this time, most of these “chumps” will have realized how utterly foolish it is to continue making large payments on a home which they don't own at all – when they could buy or rent elsewhere, much cheaper, simply by walking away.

Those who would consider making payments, just to help bail-out “fat cat” bankers, may not have any choice when they lose their jobs. In the real world, the U.S. is on track to lose an additional 20 million jobs this year, as demonstrated by the weekly lay-offs, combined with last year's monthly numbers (see “U.S. Economy to lose 20 MILLION jobs this year”).

The second area where this government report is seriously flawed is that it is based on the utterly fraudulent numbers of the U.S. government concerning house prices. “Official” government propaganda was that U.S. house prices increased in January and February – yet even the hopelessly optimistic NAR (“National Association of Realtors”) just reported a 14% drop in 1st quarter prices this year. The much more respected Case-Schiller Index puts that number above 18%.

Continuing with the fraudulent analysis, the U.S. government has vowed that it can keep interest rates at historic lows. This is deceit of the worst kind. With foreigners rapidly losing their appetite for any kind of U.S. paper (see the monthly TIC reports), the U.S. government is now dumping the largest glut of U.S. Treasuries on an already-saturated market which has clearly topped.

Is the U.S. government prepared to “buy up” more than $1 TRILLION of its own Treasuries (this year, alone), and pay the huge price of a collapse in the U.S. dollar (from “monetizing” all that debt)? If not, U.S. interest rates must soar much higher to attract tight-fisted foreign investors.

To summarize, with insanely optimistic projections for home prices, employment, and interest rates guiding it, the Office of Management and Budget has grossly underestimated the capital requirements for Fannie Mae and Freddie Mac – and the only way to come up with the hundreds of billions needed by these bankrupt behemoths is to send “Helicopter” Ben back to his printing-press.