There are two really big things that the sweeping financial regulation bill doesn't even begin to tackle -- Fannie Mae and Freddie Mac.
At $145 billion and counting, bailing out the mortgage giants is turning out to be the most expensive part of the financial meltdown.
Fannie and Freddie are basically expensive wards of the state. And yet, they are critical components of the housing market recovery -- such as it is.
"Right now they're responsible for the financing of roughly three out of every four mortgages," says Ed DeMarco, the government's conservator who oversees Fannie and Freddie.
In September 2008, the federal government stepped in to save the firms from insolvency. And the U.S. Treasury is backing up the firms' losses -- some estimate the total bill could reach $400 billion. Fannie and Freddie's future is in doubt, but DeMarco says one thing is certain: "We cannot do this indefinitely."
'No Way To Run A Business'
Fannie and Freddie were created by Congress to expand home ownership. But they were also private companies with shareholders -- a strange blend of public and private.
What these companies did, and still do, is buy loans from banks, bundle them up into securities and then sell the securities to investors -- with the promise that if the loans go bust, the firms will take them back.
And go bust they have. As of April, the two firms were sitting on more than 160,000 foreclosed homes, each home representing more money down the drain.
"That's unstoppable because those liabilities are sitting with Fannie and Freddie and taxpayers," says Tom LaMalfa, who has been a mortgage industry analyst for 30 years. "So irrespective of what we do, the bill is continuing to grow."
LaMalfa is among a growing chorus of people who say the government should get out of the mortgage business.
"I really believe we don't need the government," he says. "We don't need this huge government presence. It's done very few positive things. And it has created this huge liability. That's no way to run a business."
"We tried, it was a dismal failure, and we're never doing that again," is what Dwight Jaffee says he would like to see on Fannie's and Freddie's tombstones. He's a professor of finance and real estate at the Haas School of Business at the University of California Berkeley.
"The only role of Fannie and Freddie is to be an intermediary between the Main Street lender who makes the loan and the Wall Street investors who buy the mortgage-backed securities," he says. "There's plenty of private investment banks that will serve that role just as well as Fannie and Freddie."
Of course, he says, there would be a transition period. But not everyone is ready to write that obit just yet.
"The last time the government was completely out of housing finance was the 1920s, and that didn't work really well," says Richard Green, a professor of policy and business at the University of Southern California. "That imploded."
Green says the debate is really about what types of loans will be available to consumers. He says we need Fannie and Freddie or something that resembles what they were like in the 1990s.
"I'm reasonably convinced that we would not have 30-year, fixed-rate ... pre-payable mortgages without them," he says. "If we want to have sort of the standard American mortgage, I think we need to have institutions like this."
Dealing with Fannie and Freddie could mean rethinking the entire mortgage system. And maybe that's why lawmakers decided to put this one off for later.
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