Loan Giants' Takeover Hasn't Paid Off

Almost two months ago, the government sought to revive the nation's ailing mortgage sector by seizing Fannie Mae and Freddie Mac and pumping money into the home-loan market. But so far, the measures have yet to achieve their intended effect.

Backed by taxpayers, the mortgage finance giants have spent billions in an attempt to push down loan rates and make it easier for people to borrow money to buy homes. But mortgage rates have gone up.

The Treasury Department has also started buying $10 billion in mortgage bonds issued by the companies, with the ultimate goal of ensuring that mortgage lenders have a ready stream of money to lend. But the effort has been offset by a global sell-off of these bonds.

And even though Fannie Mae, of the District, and Freddie Mac, of McLean, have taken steps to help thousands of people avoid foreclosure, some housing advocates say the companies are not doing enough to help others keep their homes.

Federal Deposit Insurance Corp. Chairman Sheila C. Bair has urged the companies and their regulator to be more aggressive in helping people avoid foreclosure, according to people familiar with the matter.

This shows how hard it is for the government, even with control of the companies, to overcome an adverse market and overhaul entrenched foreclosure practices.

The government has taken a number of steps to bring mortgage rates down through Fannie Mae and Freddie Mac. The companies, which together own about $1.5 trillion in mortgages, are expected by the government to grow their portfolios by about $100 billion each over the next year. By pumping so much money into funding mortgages, the thinking goes, rates will decline and stabilize.

The day before the companies were taken over, interest rates on 30-year, fixed-rate mortgages averaged 6.34 percent. Yesterday, they averaged 6.56 percent, according to HSH.com, which surveys lenders. The figures have swung wildly over the past two months.

"It makes it very hard for consumers to have any sense of what's happening to interest rates," said Keith Gumbinger, HSH vice president. "There's not enough time between the move in interest rates and the consumer's ability to react to that." Doubts are growing among financial analysts and investors about whether the companies will be able to meet the government goal despite their best efforts.

To increase their portfolios, the companies borrow money. The problem is that they have been able to borrow only at higher rates because of investor anxieties over the credit markets generally and the fate of the companies specifically. This in turn has constrained their ability to borrow. The companies will issue $16.3 billion in debt this month, compared with $32.7 billion last month, according to Jim Vogel, an analyst at FTN Financial Capital Markets. That's the lowest level in at least eight years.

With borrowing costs so high, Vogel said, the companies may no longer be earning enough from mortgage investments to cover their costs. That means Fannie Mae and Freddie Mac may find it more difficult to fund themselves.

"The market doesn't want to buy the debt of a gigantic financial institution that's funding its assets at a loss, regardless of how the U.S. government may or may not be standing behind them," he said.