Fannie, Freddie rescue binds taxpayers to housing market

Bank failures, after a long period of quiet, are rising. The Treasury's Federal Deposit Insurance Corp. could run through its insurance fund this year and may need additional money from the Treasury to protect insured depositors.

Now the Treasury is becoming an equity investor in Fannie and Freddie and a buyer of their mortgage-backed bonds.

The move is a bid to help restore calm to credit markets, possibly lowering the cost of mortgages and, by extension, helping the housing market recover. The more successful the effort is, the less it will cost taxpayers.

"The Treasury may have to put a couple hundred billion dollars into these [GSEs]," says Christopher Whalen, managing director of Institutional Risk Analytics, a firm that tracks the health of financial institutions.

But beyond the injections of capital to get through the current crisis, he says ongoing operations of Fannie and Freddie should reap profits for the Treasury – thus providing some long-term offset to the bailout's up-front costs.

"Hopefully the cost to the taxpayer will eventually be zero," he says. "It might even be positive. But it has to be done right."

Doing it right, in his view, depends on resolving the long-term structure of the two companies – a politically divisive issue that will be debated by Congress and the next president.

Mr. Whalen suggests that over time, the government should shed the large portfolios of loans that Fannie and Freddie currently hold. The GSEs should focus on their role as a conduit, guaranteeing loans for resale. If the fee for those guarantees is set right, it should be a profitable business – and he suggests that that business be nationalized.

Other finance experts and policymakers argue for other strategies, ranging from privatizing all GSE functions to nationalizing them as much larger entities than Whalen recommends. The Treasury's new "conservatorship" plan holds the door open to many options, including ultimately returning the companies to their former status as public-private hybrids – but with tighter regulatory supervision.

"In the short term, yes, a bailout's necessary," says Joseph Mason, a finance expert at Louisiana State University in Baton Rouge. "The question becomes, [is it] an opportunity to exit … the current egregious level of government involvement in housing finance?"

Others say the subprime lending debacle is evidence that a strong role for the government in housing finance remains needed. "Private securitization [of mortgages] in secondary markets is what caused this mess" in the real estate market, says Dan Immergluck, a housing expert at Georgia Tech in Atlanta.

Because the GSEs have long been viewed as having implicit federal backing, delaying or avoiding intervention might have added to the ultimate taxpayer tab.

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