Freddie and Fannie

This week President Obama will sign the financial reform legislation passed recently by the U.S. Congress. As mentioned here previously, the reform measure did NOT include any provisions about what to do with the two government lending giants Freddie Mac and Fannie Mae. These private institutions were taken over by the government in 2008 to prevent a giant mortgage meltdown as the financial crisis expanded.
The Wall Street Journal last week estimated that the government has put $145 Billion into these institutions since their takeover to maintain solvency. Other estimates place the possible taxpayer-funded short-fall at three to four times that amount (or more than $450 Billion) if only a fraction of the mortgages in trouble fail in the short-term. Freddie and Fannie guarantee mortgages; i.e. they pay the note holder in case of a default by the borrower. Between the two institutions, they guarantee almost 50% of all mortgages in the USA, about $5 Trillion worth. Together with the Federal Housing Administration (FHA) they guarantee 90% of all residential mortgages in the country.
Any plan to revamp Freddie or Fannie will have to include some form of government subsidy and control. The question is how much and what incentives and requirements will have to be placed upon the private portion of the firms to ensure that mortgage monies will continue to flow. The only reason most, if any, mortgages are available today is because of the government guarantees. Mortgage rates will have to increase which will negatively affect teh already weakened housing market, which is the primary reason no action has been taken to date by the Obama administration or the Congress. However, continued waiting will only postpone the day of reckoning with the risk that the burden taxpayers may have to carry increases daily.