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How much federal help for housing?

Woes of Fannie Mae, Freddie Mac revive debate on the role of government in the market.

By Staff writer of The Christian Science Monitor / July 18, 2008

Trouble at two linchpin mortgage companies is forcing Congress to consider a quick rescue package and in the process reviving an ideological debate about the US government's role in the housing market.

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The questions are not merely theoretical. They include: Should the federal government, on top of its existing debt of about $9 trillion, become the explicit backer of home loans – to the tune of $5 trillion and rising?

That's the tally of loans owned or guaranteed by Fannie Mae and Freddie Mac. The two corporations blend private management with a federally chartered role to help an often-volatile mortgage market function smoothly. Despite the word "federal" in their original titles, the government does not explicitly stand behind either one.

In the ongoing housing crisis, it may have to.

With investors losing confidence in Fannie and Freddie, politicians of both parties agree there's little choice but to make sure the firms don't fail – or even approach the brink. Where lawmakers don't all agree is whether that should mean a perpetually larger federal responsibility in the housing market.

"There are certainly a number of different possibilities, rising from outright nationalization to privatization and breaking them up," Federal Reserve Chairman Ben Bernanke said in a congressional hearing this week, summarizing the options. "My main hope is that you'll come to a good consensus and get legislation out."

The most politically feasible choice, analysts say, involves neither dismantling the duo nor turning them into state entities. Among the voices supporting that course is Mr. Bernanke's own.

"I think the right solution is to keep them in their current form but to provide very strong oversight that will ensure adequate capital going forward," he said at the hearing after being asked for his view.

The Bush administration seeks congressional approval for two temporary measures: expansion of an existing line of government credit available to Fannie and Freddie, and permission for the US Treasury to become an investor in the firms if needed. The second move would raise capital so that Fannie and Freddie can cover loan losses and remain in a healthy operating position.

Share prices of the enterprises plunged during the past year, a sign that attracting fresh investor capital will be difficult.

Still, the rescue plan must run a kind of ideological gantlet. Some conservatives oppose the already large role that Fannie and Freddie, as creatures of US intervention, play in the private sector.

Meanwhile, House Democrats have moved to attach the measure to a larger housing bill.

Perhaps the most contentious issue is whether the Treasury should have no limit on the size of any capital infusions to the so-called government sponsored enterprises (GSEs).

Treasury Secretary Henry Paulson used a colorful analogy in making his case to skeptical lawmakers this week. He argued that having the "bazooka" (no limit) would make it less likely that a loss of investor faith would force the Treasury to invest at all. A limit would constitute handing the Treasury a "squirt gun" to deal with the crisis, he argued.