Because they and the rest of their brethren on Wall Street, to quote President Bush, "got drunk." Unfortunately for us, rehab for the subprime mortgage crisis is a helluva lot more expensive than a 30-day visit to the Cirque Lodge Treatment Center in Utah.
The Federal Home Loan Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage Association ("Fannie Mae") were both created by the government to help create more money for banks to make mortgage loans. Let's stay with Dubya's drinking analogy and describe Fannie and Freddie, for much of that time, as straitlaced professionals who nonetheless enjoyed guzzling Grey Goose: prime loans, made to borrowers with good incomes and sterling credit records. And the two lenders drank a lot: By 2008, Fannie and Freddie had ended up with half of the nation's vodka, er, mortgage loans. (They have $12 trillion in loans and loan guarantees in their portfolios.)
Only problem is they didn't stick with the premium stuff. Freddie, Fannie and lots of their banking brethren ended up drinking all the Grey Goose, so they had to stoop to Smirnoff (slightly riskier loans made to folks whose credit wasn't all that great). By 2006, even the Smirnoff was gone, so they started drinking Popov — yup, the rotgut. In mortgage terms, that meant making subprime loans, offered to people who didn't have to prove they had any income and didn't have to produce a credit report.
Nobody likes to drink rotgut. But Freddie and Fannie and their slick Wall Street buds figured out ways to mask the taste by "securitizing" subprime loans into tricky and complex investments called CDO's and MBS's. Sorta like drowning them in cranberry juice.
Only then the cranberry juice ran out, too. The housing bubble burst in 2006, and homeowners and speculators — strung out on adjustable rate loans — stopped paying their mortgages. The value of the homes fell below the amount the banks had loaned, leaving Freddie and Fannie with billions of dollars in losses, threatening their future. They were down and out, lying in the gutter, clutching a brown paper bag with a 375-ml bottle of cheap potato juice.
But Freddie and Fannie are family; we, as taxpayers, created them, even though private shareholders own them now. We don't legally have to bail them out, but like a caring (but enabling) uncle, we will take them to rehab and pay their overdue liquor bills or risk the collapse of our entire mortgage lending system and, maybe, our financial system, too.
The best estimate for taxpayers to cover Freddie's and Fannie's bar tabs? The Congressional Budget Office thinks maybe $25 billion will do the trick.