By Zachary A. Goldfarb
Washington Post Staff Writer
Thursday, October 21, 2010; 9:35 PM

The bailout of Fannie Mae and Freddie Mac is likely to cost taxpayers an additional $19 billion and may cost as much as $124 billion more if the economy starts shrinking again, according to a government projection released Thursday.

The rescue of the mortgage giants, which have helped keep the housing market alive amid economic crisis and recession, already has a price tag of $135 billion. The money went to cover losses on defaulted home loans.

The ballooning price of the Fannie and Freddie bailout comes as the Obama administration celebrates news of lower costs on other financial rescues. Administration officials are also preparing to release a plan for reforming the two companies in coming months.

In its projection Thursday, the Federal Housing Finance Agency sought to indicate how much more money the companies may need in the next three years under different economic scenarios.

In the most likely, as defined by the agency, which regulates the two companies, housing prices would decline slightly amid a modest economic recovery, and then inch upward. In this scenario, the total bailout of Fannie and Freddie would cost $19 billion more, or $154 billion.

A more optimistic projection has the housing market springing back to life sooner. In this case, the companies would need just $6 billion more, or $141 billion.

Finally, in a darker scenario, in which housing goes into another tailspin amid a second recession, they would cost $124 billion more, or $259 billion.

Federal Financial Analytics, a Washington research firm, said the FHFA projection gave a good indication of what Fannie and Freddie may ultimately cost taxpayers, but "nowhere near a definitive picture of it."

The firm noted that the analysis was based on housing prices and ignored the potential costs associated with a massive breakdown in the foreclosure process that has recently come to light.

"It's simply impossible to forecast reliably now how much foreclosuregate will cost" Fannie and Freddie, the firm said in a memo to clients Thursday.

Repayment unlikely

In any event, it is becoming increasingly clear that the rescue of Fannie and Freddie will be the most expensive part of the government's response to the financial crisis. While many banks and even American International Group have repaid or are working to reimburse the government, the likelihood of Fannie and Freddie doing so is slim, their regulator said.

The sustained hemorrhaging at Fannie and Freddie comes in sharp contrast to the celebratory tone of the Obama administration recently when discussing the bank rescue known as the Troubled Assets Relief Program.

Originally valued at $700 billion, TARP is now expected by congressional analysts to cost less than a 10th of that.

The eye-popping size of the mortgage giants' bailout underscores the complexity the Obama administration faces as it prepares a plan for overhauling the nation's housing finance system. The administration has promised to deliver its proposal by January.

With the collapse of the private market for home loans, Fannie and Freddie have been essential to keeping interest rates low and shoring up the housing market. They also play a key role in changing the terms of home loans that borrowers can't afford to pay.

Fannie and Freddie were seized by regulators in September 2008 as the financial crisis intensified. The Bush administration pledged $200 billion to keep them solvent. The Obama administration soon doubled that number to $400 billion. Late last year it pledged unlimited support.

"From the beginning, the Obama administration has made clear that the current structure of the government's role in housing finance, while necessary in the short-term to provide critical support to a still-fragile housing market, is simply not acceptable for the long-term," said Jeffrey Goldstein, Treasury undersecretary for domestic finance.

Costly dividend

The arrangement between Fannie and Freddie and the Treasury is highly complex. The best example of that is the requirement that the companies pay a 10 percent dividend on any cash infusions they receive from taxpayers.

The dividend makes it difficult for Fannie and Freddie to make enough money to become stable companies that don't need taxpayer support.

That's because, as they receive more money to cover losses, the size of the dividend grows. It has already increased so much that the companies must get cash from taxpayers to pay the dividend.

It's a vicious circle. Under the most likely FHFA projection, for example, taxpayers must give a total of $154 billion to Fannie and Freddie to cover losses on bad home loans. That's money the Treasury doesn't get back. But then the Treasury will also provide $84 billion to Fannie and Freddie to cover dividends, which it would get right back. In the end, it's all a wash to the taxpayer.

Government-picked Fannie and Freddie executives, wanting the chance to restore their companies to profitability, have periodically asked the Treasury to reconsider the arrangement, according to many sources familiar with the requests.

Both the Bush and Obama administrations have demurred. An administration official said the dividend is a fair price for the companies to pay in exchange for taxpayer support and would be reexamined only in the context of an overall revamp of housing finance policy next year.