Cloudy Future for Fannie and Freddie

The Great Bailout is mostly over for the banks. But for those troubled behemoths of the nation’s housing bust, Fannie Mae and Freddie Mac, the lifeline from Washington just keeps getting longer.

Fifteen months after Fannie

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[FNM  Loading...      ()   ] and Freddie

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[FRE  Loading...      ()   ] were effectively nationalized, neither the Obama administration nor Congressional leaders see a quick solution to one of the thorniest problems in American finance: how to fix the twin mortgage giants without choking the flow of credit to homeowners and dealing a blow to a still-fragile housing market.

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The administration had said for months that it would begin charting a new course for Fannie and Freddie when it released its budget proposal on Monday. The companies, crucial pillars of American housing, already have consumed over $112 billion of taxpayer dollars.

Bankers, builders and homeowners stand to win or lose from any plan for the two so-called government-sponsored enterprises, or G.S.E.’s. But, on Monday, that plan amounted to a single, ambiguous sentence from the White House:

“The administration continues to monitor the situation of the G.S.E.’s closely and will continue to provide updates on considerations for longer-term reform of Fannie Mae and Freddie Mac as appropriate.”

Treasury officials say more details may be forthcoming, although they decline to say when. To many experts, however, the message is that Fannie and Freddie are likely to remain wards of the state for years.

And, given the alarm in some quarters over the mounting budget deficit, these two giants and their vast obligations are likely to remain conveniently — and controversially — off the federal books. Fannie Mae and Freddie Mac have obligations of $3.9 trillion to investors who bought bundles of mortgages that the companies assembled.

Powerful and often competing interests are grappling over the companies’ futures. Lawmakers on both sides of the aisle, eager to demonstrate their scorn for the companies, have called for their eradication. But few policy makers are willing to take aggressive steps that might weaken the housing market. On Christmas Eve, the White House quietly disclosed that it had, in effect, given the companies a blank check by making their federal credit line unlimited; the ceiling had been $400 billion.

For decades, Fannie and Freddie have played a central role in the housing market. But when the market began falling apart in 2008, so many of the home loans that Fannie and Freddie had bought or guaranteed went bad that the companies nearly went bankrupt. The government essentially took them over.

Today, many financial companies are pushing to shrink or even dismantle the two G.S.E.’s in hopes of expanding their own businesses into the resulting vacuum. Financial executives contend that the government does not belong in the housing market. Given the animosity directed at the financial industry in general, however, few will criticize the government publicly.

“Almost no other country has companies like Fannie and Freddie, where the government essentially competes with private banks,” said one executive who was not authorized to speak to the media or willing to publicly criticize any government decisions.

“People still manage to buy houses in France and England,” the executive continued. “One of the attractions of abolishing Fannie and Freddie is that a source of competition is gone. But, by the same token, if Fannie and Freddie hadn’t existed, maybe things wouldn’t have gotten so out of hand in the first place.”

Others disagree — often also for reasons of self-interest. The construction and real estate industries, two powerful political constituencies, essentially want to preserve the status quo so that their customers, homebuyers, can continue buying homes.

“If the government isn’t involved, you run the risk of the secondary mortgage market drying up at exactly the wrong time,” said Jerry Giovaniello, the chief lobbyist for the National Association of Realtors. “Private companies get tighter with money when things get bad. The government is the only one who can make sure capital continues flowing.”

Shading all of this is election-year politics. In a polarized Washington, Democrats and Republicans seem to agree that flogging Fannie and Freddie might play well to an electorate weary of costly bailouts and anxious about the rising national debt.