A Bid to Rescue Homeownership

But the larger question is: Should Fannie and Freddie continue to exist at all?

Absolutely, says economist James K. Galbraith, the Lloyd M. Bentsen Jr. chair in government and business relations at the University of Texas at Austin.

The government bailout is a good thing, said Galbraith, the author of "The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too."

"It's hard to see how it could have been avoided," Galbraith said in an interview. "These institutions created American homeownership as we know it. They created a flow of money to the housing market. All of us who are homeowners will be high and dry if this function gets taken away."

In announcing the takeover of Fannie and Freddie, Treasury Secretary Henry M. Paulson Jr. said it was necessary to continue "supporting the availability of mortgage finance."

But there are those who think the bailout should be a prelude to a reduced role of both Fannie and Freddie in the supply of mortgage money.

Radhakrishnan Gopalan, assistant professor of finance at Washington University in St. Louis, said that in the long term, he sees a significantly diminished role for Fannie and Freddie.

"When they were established, the market was not doing a good enough job of making homeownership available to the common man at a reasonable price," Gopalan said. "Liquidity has increased. And think about it. The root cause of the current crisis is that mortgages were too easily available to many people who shouldn't have gotten them."

"The ideal option would be to gradually downsize them, limit their activity to only those sectors where there is a genuine need for government support for mortgage finance and let the private sector take over the financing of most mortgages," he said.

Gopalan believes the capital markets are "sufficiently well developed to make mortgages cheap and accessible."

My concern is we don't really know what the market will do without a Fannie and a Freddie. We do know that there are too many areas of the country where the working class can't afford to buy.

If the prices of mortgages rise significantly in the absence of Fannie and Freddie, we may return to a time when only the financially well heeled could afford to buy a home.

With homeownership such a key part of people's net worth, I'm not sure we can afford to eliminate or smack down Fannie and Freddie's role in the housing market.

· On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and athttp://www.npr.org.

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