The federal government has adopted a consistent, if questionable, M.O. whenever housing-related troubles bubble up: Intervene, especially if the teetering party is big and rich enough to have lobbyists from both parties.
Earlier this year, taxpayers backed the sale of Bear Stearns to rival J.P. Morgan when the former's gamble on subprime mortgages failed to pay off. Now Uncle Sam has again extended a hand, this time to the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. - known as Fannie Mae and Freddie Mac, respectively. The Bush administration wants to help the struggling mortgage giants by offering a larger line of credit from the U.S. Treasury, as well as the ability to borrow directly from the Federal Reserve.
We're not thrilled by this. But given Fannie's and Freddie's magnitude, we see no other practical, immediate alternative.
Fannie and Freddie are government-sponsored enterprises (GSEs). These shareholder-owned companies were created by Congress with specific goals in mind: to keep money streaming into the homes market, thus making mortgages more affordable and accessible. The GSEs buy mortgage debt from approved lenders, such as banks - thereby freeing them up to make more loans - and then sell some of them as securities for investors. Together Fannie and Freddie own or guarantee half of all America's mortgage debt, about $5.3 trillion.
Over the years they've financed such an astonishing amount because investors feel their special GSE status comes with an implicit guarantee - that the government would bail them out if needed.
Now, however, Fannie and Freddie are facing a crisis of confidence due to sinking home prices and rising mortgage defaults, neither of which is their fault. Fannie lost more than $2 billion in this year's first quarter, and Freddie lost $151 million. Wall Street worries that they don't have adequate capital on hand - they do get some blame for that - to cope with such large losses. Shares of each plummeted last week to historic lows. Now that implicit government guarantee is being tested.
On the one hand, Fannie and Freddie really are too big to fail. The $5.3 trillion they own or guarantee is twice the size of the economy of the United Kingdom. If a government rescue was not forthcoming and they were unable to keep the money flowing, mortgages would be harder and more expensive to get at a time when that's the last thing Congress wants or the nation needs.
Fannie and Freddie shareholders would flee; the corresponding impact on the markets and on everybody who has money in them - including middle-income Fred and Ethel, who are counting on being able to retire someday - would not be pretty. The whole world would feel the effects, since Fannie and Freddie are intertwined with investors, financial institutions and central banks around the globe.
The feds have been quick to rescue Bear Sterns, Fannie Mae and Freddie Mac, but help for homeowners has been too long coming. The same logic applies to the thousands of families threatened with foreclosure: Bad investment decisions shouldn't be rewarded, but the foreclosure crisis is hurting everyone's home values - and devastating some neighborhoods.
The Senate finally approved a balanced housing bill last week. It's time the House followed suit.
