Some of these roles have led to loses and will lead to more to come.
Taxpayers have had to bailout Fannie and Freddie to the tune of $200 billion and are still 'on the hook' for further and even unlimited loses, thanks to Barney Frank and our wonderful lawmakers. Thanks to Federal Reserve pump-priming, printing and MBS purchases, housing prices appear to be stabilizing which should help stabilize mortgage portfolios at those agencies. But keep an eye on upcoming bailouts for Sallie Mae, the agency that dominates the student loan market.
I recently commented about the student loan 'bubble' in my blog entitled The Student Loan Bubble and Bailout. The government (Sallie Mae) is still loaning to students at record rates and student loan burdens have quadrupled in 10 years. While student loans have soared 400% in 10 years, college tuition and fees have risen about 300%. Do you see a connection here? See the following chart showing college tuition inflation from Inflationdata.com:
|College Tuition and Fees Vs Overall Inflation (CPI)|
The Federal Government Subsidizes Student and Mortgage Loans and the Taxpayer Incurs LosesYou ever wonder why credit card rates from your bank are 13 to 15%? It's because, in private enterprise, banks have to set rates to take into account default losses. Credit card debt defaults have recently run about 4 % or so, meaning that banks are making a very profitable 9 to 11% on credit card balances. Default rates can run much higher however.
Since student loan delinquencies are suddenly 11% with 9% in default. Since the cost of money for the government is about 3%, this means that, if the government priced student loans taking into account the cost of defaults, then student loan rates would be about 12% or near typical credit card rates.
The beauty of free markets is that if student loan rates, if set in the private market, would have already risen gradually along with default rates and this rise would have already curtailed the quantity of loans being made. This means that we wouldn't have a student loan bubble today if the government hadn't encouraged it (had been more like a private enterprise). It's why the government became 80% of the student loan market: private lenders bowed out long ago.
But instead, we have ANOTHER financial bubble on our hands and losses will accrue to the taxpayer. Worse, student loans are still being made at inappropriately low rates which means loans are continuing and losses will continue to mount! But there are No Adults In Charge in Washington!
Indeed, the treasury has had to fund about $200 billion in losses at Fannie Mae and Freddie Mac (gov't mortgage entities) over the past 5 years. See Figure 1 below. There may be more to come. But keep an eye on subsidies to Sallie Mae to cover delinquent student loans.
Net Income for Freddie Mac and Fannie Mae