NEW YORK - June 23, 2010 - The news that new home sales plunged by 33% in May - to the lowest level on records dating back to 1963 - was disturbing for homeowners. But that is also bad news for taxpayers, because the government mortgage giants Fannie Mae and Freddie Mac remain mired in a swamp of shaky loans that taxpayers may get the bill for.

Taxpayers may be more exposed to the housing market than they think, because the government owns Fannie Mae and Freddie Mac. And they own or guarantee half of all the mortgages in the country.

Senator Jim DeMint, a Republican from South Carolina, says that means "one of our most important private sector economic activities is controlled in large part by the federal government."

And taxpayer exposure is growing. In the first quarter of this year, Fannie and Freddie saw about 1,000 foreclosures a day, one about every 90 seconds. That's 91,000 in just three months.

Also, the government, meaning the taxpayers, has inherited more than 163,000 foreclosed homes.

Because the federal government took over Fannie and Freddie, that means the taxpayers own all those homes, and own or guarantee the mortgages for 31 million more.

Fannie and Freddie have already soaked up 145 billion in taxpayer funds. Some fear it could go to 500 billion.
How did this happen? During the Clinton years, the federal government set out to expand homeownership to low income people. Fannie and Freddie encouraged that by buying up mortgage loans from the original lenders.

Knowing they could dump their loans to Fannie and Freddie, lenders were perfectly willing to make shaky ones - with no money down (or teaser rates) or no documentation of income, known as liar's loans.

Diana Furchtgott Roth, a former chief economist for the Labor Department, now at the Hudson Foundation, says the lenders "didn't check as carefully on the payments because they knew that they weren't going to get stuck with the actual loan itself."

That spread the practice of weaker loans and, some argue, laid the groundwork for the recent financial meltdown.

"Most of us believe that Fannie Mae and Freddie Mac played a large role in causing the financial meltdown, says Senator DeMint, "certainly the housing bubble with subprime loans, the securitized subprime loans that brought down the worldwide financial system."