Related topics: mortgage rates, home buying, economy, housing, politics
Their failures are manifest, and politicians of every stripe seem to revile them. Fannie Mae and Freddie Mac turned out to be the biggest catastrophes of the 2008 financial meltdown. The government has already spent more than $130 billion in taxpayer money to keep them alive, and the tally is rising.
If they were in any way expendable, the two mortgage agencies would be gone by now. But the credit crunch of the last three years has left middle-class homebuyers more dependent than ever on Fannie and Freddie.
The two agencies' main role is to purchase mortgages from banks and roll them into marketable securities, which benefits homebuyers by keeping rates relatively low and giving banks a stronger incentive to lend.
One byproduct is the 30-year fixed-rate mortgage, which most banks wouldn't offer without the government's backing, because the odds of losing money would be higher. Fannie and Freddie effectively reduce the risk of lending, making more people eligible for loans and therefore homeownership.
That's the idea, anyway, but obviously something went wrong.
During the housing boom, many lenders -- including Fannie and Freddie -- lowered their lending standards to accommodate millions of people who wanted in on the hot market, but ordinarily wouldn't have qualified for a loan. The result of those bad loans was an epic housing bust that's now in its fifth year, with home prices down more than 30% from the peak in 2006, and still falling.
That led directly to the financial crisis that erupted in 2008, when Fannie and Freddie became insolvent and were taken over by the government.
The irony now is that Fannie and Freddie are keeping the housing market alive.
Nearly all mortgages issued today are backed by Fannie, Freddie or the Federal Housing Administration, a sharp increase from normal times, when private lenders handled at least 20% of mortgages without any government backing. Without the government, in other words, hardly anybody would be able to buy a home today.
The private mortgage market should revive as the overall economy heals. But as badly as policymakers may want to wind down Fannie and Freddie, it's obvious that doing so abruptly would crater the housing market all over again and trigger another recession.
So the first efforts at housing-finance reform call for a gradual wind-down of the two mortgage giants. The Obama administration's plan is to reduce Fannie's and Freddie's loan portfolios slowly, with three options for how to replace them ultimately.
One would be a housing-finance system that's mostly private, with the government backing mortgages only for some low-income and first-time buyers, as well as veterans. Another option is a private system with a mechanism for government intervention during emergencies or financial crises, to keep the housing market functioning.
Under the third option, the government would still be involved, but it would have a more limited role than it does now and would charge private lenders more to backstop loans.
Under all those scenarios, Fannie and Freddie would go away, replaced, if necessary, by new or different agencies not stigmatized by loathsome bailouts.
But President Barack Obama's plan is a wish list, and even though some Republicans in Congress would gladly kill the two agencies tomorrow, it's not likely to happen.
"We believe getting rid of Fannie and Freddie is much harder than it looks," analyst Jaret Sieberg of MF Global said in a research note to clients. "The status quo is the most likely outcome."
