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Fannie Mae and Freddie Mac may need little to no money to stay afloat, or they may need a boatload more cash, according to a government report (pdf) released Thursday. The mortgage companies will probably require another $19 billion in aid over the next three years, but they may require as little as $6 billion or as much as $124 billion depending state of the economy.
The government’s report about Fannie and Freddie’s future prospects is not-news-exactly to Robert McDonald, a professor of finance. “It should be no surprise that their future losses will be small if over the next several years the economy does well and large if the economy does poorly,” he said.
McDonald and Deborah Lucas, a finance professor at MIT, performed a similar exercise a few years ago when they estimated the value of the until-recently-implicit government guarantee. (Before the bailout, the government technically did not guarantee Fannie and Freddie’s debt. Investors assumed otherwise, and in the end, they were right.)
The two researchers ran Fannie and Freddie’s numbers through a sophisticated model thousands of times, with each run simulating a different turn of events. For example, in one simulation, the economy would go to hell in a handbasket, where in another it would grow robustly. With each modeled result, McDonald and Lucas received an estimate as to how much money the government guarantee was worth, or in other words, how much the government was on the hook for. Their results were largely confirmed by the later government bailout of the two mortgage companies.
“We simulated many thousands of possible outcomes, of which we are now seeing one,” McDonald said of the government report.
The report’s forecasts will likely further upset an already bailout-weary public, but in a way the previous government bailout was just an overdue payment on an insurance plan. The latest forecasts, then, are simply estimates of what the premium will be for the coming years to ensure Fannie and Freddie don’t fail and bring down the entire housing sector with them.