Despite assurances that the takeover of Fannie Mae and Freddie Mac would be temporary, the giant mortgage companies will most likely never fully return to private hands, lawmakers and company executives are beginning to quietly acknowledge.
The possibility that these companies — which together touch over half of all mortgages in the United States — could remain under tight government control is shaping the broader debate over the future of the financial industry. The worry is that if the government cannot or will not extricate itself from Fannie and Freddie , it will face similar problems should it eventually nationalize some large banks.
The lesson, many fear, is that a takeover so hobbles a company’s finances and decision making that independence may be nearly impossible.
In the last six weeks alone, the Obama administration has essentially transformed Fannie Mae and Freddie Mac into arms of the federal government. Regulators have ordered the companies to oversee a vast new mortgage modification program, to buy greater numbers of loans, to refinance millions of at-risk homeowners and to loosen internal policies so they can work with more questionable borrowers.
Lawmakers have given the companies access to as much as $400 billion in taxpayer dollars, a sum more than twice as large as the pledges to Citigroup , Bank of America , JPMorgan Chase , General Motors , Wells Fargo , Goldman Sachs and Morgan Stanley combined.
Regulators defend those actions as essential to battling the economic crisis. Indeed, Fannie and Freddie are basically the only lubricants in the housing market at this point.
But those actions have caused collateral damage at the companies. On Monday, Freddie Mac’s chief executive, David M. Moffett, unexpectedly resigned less than six months after he was recruited by regulators, having chafed at low pay and the burdens of second-guessing by government officials, according to people with knowledge of the situation.
Fannie Mae has also experienced a wave of defections as people leave for better-paying and less scrutinized jobs.
Last week, Fannie Mae announced that it lost $58.7 billion in 2008, more than all its net profits since 1992. Freddie Mac is also expected to reveal record losses in coming days.
Most important, by taking over the companies, lawmakers have gained a lever over the housing market and national economy that many — particularly Democrats — are loath to discard, legislators say.
“Once government gets a new tool, it’s virtually impossible to take it away,” said Representative Scott Garrett, a Republican of New Jersey and member of the Financial Services banking subcommittee. “And Fannie and Freddie are now tools of the government.”
One reason that Fannie and Freddie will never return to their earlier forms is simple mathematics: to become independent, Fannie Mae and Freddie Mac must repay the taxpayer dollars invested in the companies, plus interest. Even if the firms achieve profitability, it could take them as long as 100 years — or longer — to pay back the government. And almost no one expects the companies to return to profitability anytime soon.
Moreover, the takeover has provided legislators with a long-sought ability to influence the mortgage marketplace directly and pursue social goals like low-income housing.
“There is a commitment to restructure these companies, and we are going to want to retain a hand in the things that matter, like affordable housing and making sure that the housing economy doesn’t become a threat to the entire economy again,” said Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee. “Some of what these companies did will be returned to the private sector, and some of it is going to remain with a public entity.”
Republican lawmakers — many of whom believe the federal government should not be involved in the mortgage business at all — have signaled they will try to end the government’s involvement with Fannie and Freddie, even as they acknowledge that effort is likely to fail.
And lawmakers of all stripes are quietly voicing worries that government involvement in the mortgage industry could lead to the very problems that caused the current crisis.
“When you use mortgage companies for political purposes, such as helping low-income borrowers or expanding homeownership, you make bad economic decisions,” said Mr. Garrett, the Republican congressman. “And bad economic decisions are why we’re in this trouble right now.”
Analysts say that one reason Fannie Mae and Freddie Mac were privatized in the first place was to prevent political whims from dominating the mortgage marketplace. The companies were founded by the government but sold to investors decades ago.
“The theory was that if Fannie and Freddie were private, they would only be interested in profits, and so they wouldn’t take too many risks,” said Thomas A. Lawler, an economist who worked at Fannie Mae for more than two decades before leaving in 2006 to become a consultant. “If the government owns Fannie and Freddie, politicians will make choices that make voters happy, but may not be wise from an economic standpoint.
“Of course, the past year has proved that focusing on profits alone doesn’t protect you from bad choices, either,” Mr. Lawler added.
Lawmakers are quietly discussing a handful of possible proposals for Fannie and Freddie. They range from outright nationalization, in which the government would formally absorb the companies and guarantee millions of new home loans, to public-private hybrids, in which lawmakers would explicitly backstop part of the mortgage industry if economic catastrophe strikes, and would dissolve Fannie and Freddie into smaller, private companies that would handle the day-to-day business of mortgage finance, but be heavily regulated.
Lawmakers say they are unlikely to begin serious discussion about the companies’ futures until this fall.