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Reuters Breakingviews

Mortgage Debt, a Lasting Burden

Agnes T. Crane and

The government wants to wind down Fannie Mae and Freddie Mac. But the task is getting bigger, not smaller. Impaired and hard-to-sell mortgage debt — more than $900 billion of it so far — increasingly dominates the two housing finance giants’ balance sheets.

The numbers from the Federal Housing Finance Agency, which regulates Fannie and Freddie, are astounding. In a 152-page report shipped to Congress last week, the agency said 65 percent of Fannie’s $789 billion balance sheet at the end of last year was accounted for by illiquid holdings, specifically mortgage loans and nonagency mortgage-backed securities.

Freddie’s hard-to-trade assets represented more than half of its $697 billion portfolio. The subcategory of distressed assets increased nearly threefold to $367 billion from a year earlier for the two firms combined as they bought back severely delinquent loans from the pools underlying the mortgage-backed bonds they guarantee.

The regulator expects the proportion of illiquid debt to increase this year. Barclays Capital estimates the two government-sponsored enterprises are yanking about $10 billion of loans a month out of mortgage-backed bonds. Meanwhile, Fannie and Freddie are required by the terms of their government rescue to reduce the overall size of their balance sheets each year. With bad and risky loans piling up, that means they have to sell or run off good assets. The trend could continue until the still queasy housing market stabilizes.

This pattern makes winding down Fannie and Freddie even harder than it otherwise would be. Illiquid investments are difficult to hedge and costly to hold if financing costs rise. And getting rid of their huge holdings — which the two companies will eventually have to do — is sure to be a challenge. Consider the Federal Reserve’s experience with the much smaller collection of bad assets it bought from the American International Group. The central bank has sold only one-third of the roughly $30 billion of paper it acquired from the insurer, but there are already indications that investors have indigestion.

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Rick Perry of Texas gets perhaps too much credit for his state's economy.Credit...Lee Celano/Reuters

It’s another reminder that Uncle Sam’s problem with government-sponsored enterprises is festering. The longer Fannie and Freddie remain sick and their treatment is undecided, the more unpleasant — or, worse, ineffective — the results could be.

Ten-Pint Hat

Texas isn’t a good proxy for the broader economy. Rick Perry, the Lone Star State’s governor, might run for president in 2012. And Texas boasts below-average unemployment and decent growth. But it also has no state income tax, a large energy sector and not too much housing trouble. Washington’s bigger problems may not yield to Texan solutions.

Mr. Perry, who has been in charge of the second-largest state for more than a decade, cannot reasonably be called unqualified for the presidency, even though the Texas governorship is fairly weak in terms of its powers. But the attempts of his supporters to use his economic record to promote his candidacy are only partially convincing.

The state’s economic record is better than that of the United States as a whole, but only moderately so. Its unemployment rate of 8 percent is more than a percentage point lower than the national average, but has declined only modestly from its peak in March 2010. Growth has also been only a little higher than the national rate.

However, Texas started the recent recession with advantages. It had a huge housing and banking crisis in the 1980s, one reason home prices didn’t skyrocket in 2006 as they did in some parts of America. Having avoided a huge bubble, the decline since then has been relatively moderate. The state’s economy also benefits from its energy sector, spurred along by high commodity prices. The lack of a state income tax — which predates Mr. Perry — has also helped economically, particularly as other states have increased taxes during the recession.

All this has made the Texas governor’s fiscal path considerably easier than those of other large states like California and Illinois, while his economic policies have not produced obvious direct additional benefits. Mr. Perry’s decent record is mostly a product of structural differences and longstanding policies rather than anything he has enacted. Doing no harm is a good start, but the United States needs more than that. Mr. Perry would find the nation’s problems considerably less tractable than those he is used to.

For more independent financial commentary and analysis, visit www.breakingviews.com.

A version of this article appears in print on  , Section B, Page 2 of the New York edition with the headline: Mortgage Debt, A Lasting Burden. Order Reprints | Today’s Paper | Subscribe

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