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Sunday, April 15, 2012

Bits Bucket for April 7, 2012

I sadly suspect the April Fool’s joke of this article is on the U.S. taxpayer.

OPINION
April 1, 2012, 5:49 p.m. ET

Federal Lending Is as Rotten as Federal Borrowing

Uncle Sam has a loan for everyone, and many of them are likely to go bad.
By GEORGE MELLOAN

We all know about the dire fiscal outlook arising from manic federal borrowing. The interest cost of financing and refinancing the burgeoning national debt has climbed 55% over the last three years. The Obama budget predicts net interest expenses tripling to over a half trillion dollars by fiscal 2015 from the 2010 level. That is probably conservative, given the likelihood that the administration has lowballed inflation and interest-rate prospects.

If that isn’t bad enough, let’s consider the risks not from federal borrowing but from federal lending. Those risks are pretty awful, too.

The big bump in federalized lending came in August 2008 when the government took over failing Fannie Mae and Freddie Mac. With the addition of these two giants, the federal government now has a $5 trillion mortgage portfolio, much of it of dubious value.

Since the takeover, Fannie and Freddie have drawn a net $136 billion from the Treasury to cover their losses, and they could cost taxpayers $259 billion through 2013, according to their regulator, the Housing and Home Finance Agency (HHFA). On top of that, the Federal Housing Administration is facing huge losses on the home mortgages it has guaranteed over the years and very likely will also require a taxpayer bailout.

By comparison, the cost of the $700 billion Troubled Asset Relief Program in 2008 is relatively modest, a mere $28 billion so far, according to the latest government audit. Major banks have paid back their share of the loans.

As large as these numbers are and as likely that the HHFA is overly optimistic about the future of Fannie and Freddie, these exposures are only a part of the big picture of federal lending disarray. Government lending, like government borrowing, is a political tool used by Washington to win favor with voters. According to a Congressional Budget Office (CBO) report this month, the government has, in addition to Fannie, Freddie and TARP, a further $2.7 trillion in other loans and loan guarantees outstanding, and some of those loans don’t look so good either.

One of the more worrisome categories is student lending, which the government took over directly in 2010 after having merely guaranteed private loans previously. Student lending has soared along with college tuition, and has even contributed to tuition inflation by flooding colleges and universities with government cash. William Brewer, head of the National Association of Consumer Bankruptcy Attorneys, has been quoted as predicting that student loans will be the next “debt bomb” for the U.S.

The CBO’s new report says that federally issued or guaranteed student loans outstanding have grown to $706 billion from $79 billion a decade ago. (The government’s new Consumer Financial Protection Bureau estimates that all student loans outstanding now total over $1 trillion.) They don’t seem to be very good risks. A Journal story reporting on the CFPB estimate cites Federal Reserve Bank of New York data showing that as many as “one in four student borrowers who have begun repaying” are behind on their payments.

The sad state of government loan programs has produced two opposing views. Liberals want further bailouts for debtors. Dick Durbin of Illinois, the No. 2 Democrat in the Senate, has proposed that bankruptcy laws be liberalized so more former students can shed their debt burdens.

The Obama administration is pushing the idea of forgiving the portions of home mortgage debts that are under water. HHFA acting director Edward DeMarco has opposed forgiveness, telling Congress it would cost taxpayers another $100 billion. But the administration is applying pressure, offering to pay half the cost with unused TARP funds, so look for TARP losses to rise.

Taking a more responsible but politically risky approach, House Budget Chairman Paul Ryan (R., Wis.) is backing a budget bill provision that would put a more realistic value on the cost to taxpayers of government-subsidized lending. Currently, agencies calculate subsidies by comparing the interest rates on their loans to the rates on Treasury securities. Given rock-bottom Treasury rates, that often makes it look as if the agency is getting a positive return. Under Mr. Ryan’s “true value” accounting (backed in the CBO’s March report), the return instead would be measured against market interest rates.

The CBO analysis shows that true-value accounting on direct student loans would convert what the government records as a positive return into a budgetary loss.


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