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Each consecutive vintage of loans performed worse the

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Each consecutive vintage of loans performed worse. The outright default rates on loans issued in 2004 were 1.4%, 2% on loans issued in 2005, 3.3% on loans issued in 2006, and 2.6% on loans issued in 2007. With many more mortgages of the terrible 2006, 2007, and 2008 vintages yet to fail, the government decided to step in. The only way to address their impending bankruptcy – without risking a disorderly liquidation – was for the Treasury to exercise the exceptional emergency right that it had acquired to take charge. 5.2.3 Conservatorships The conservatorships – not receiverships (which carried the possible connotation of prompt liquidation, as well as an unwanted inclusion of the GSEs in the federal government’s financial accounts) – provided Fannie and Freddie each with a commitment of $100 billion from the Treasury in return for the Treasury’s receiving a 79.9% ownership stake and $1 billion of preferred stock with a 10% coupon rate. This rescue mostly wiped out the existing shareholders: GSEs’ stock prices fell to pennies on the dollar following the announcement (and eventually stopped trading altogether on the NYSE in June 2010). The conservatorships also fully protected the senior and subordinated debt and the mortgage-backed securities of the GSEs. The agreement also required the GSEs to reduce the size of their retained portfolios to $850 billion each by December 31, 2009, and to reduce those portfolios each year by 10% until they reach $250 billion each. The agreement capped the maximum outstanding debt of Fannie and Freddie at 110% of the asset limit. No limits were placed on the guarantee business. The CEOs of Freddie and Fannie were dismissed. They were surprised, expecting to receive a government capital injection on their own terms instead. The GSEs suffered another year of massive losses in 2009: $94 billion. Delinquency rates more than doubled from 2.42% in 2008 to 5.38% in 2009 at Fannie and from 1.72% in 2008 to 3.87% in 2009 at Freddie. Losses continued in the first quarter of 2010: $11.5 billion at Fannie and $6.7 billion at Freddie, and another $20 billion was tapped from the government lifeline. The second quarter of 2010 was the twelfth consecutive quarter of losses at Fannie Mae. Its $1.5 billion loss will be made up by the taxpayer once again. Likewise, Freddie Mac will draw $1.8 billion from its Treasury lifeline to fill its second quarter hole. As of the writing of this book, Fannie has drawn $85.1 billion while Freddie has drawn $63.1 billion. That is $148.2 billion out
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69 of the original $200 billion limit. In return for these draw downs, the GSEs have paid $12.8 billion in dividends to the U.S. Treasury to date. In response to the massive losses, the Treasury first increased its commitment to $200 billion per company in May 2009. It then quietly removed the ceiling on the bailout altogether on Christmas Eve 2009, promising to make up any further negative net worth in 2010, 2011, and 2012. This effectively amounts to writing a blank check to the GSEs.
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