Modifying the Mortgage Giants

More broadly, in the latter years of the housing boom, Fannie and Freddie often put shareholder profit first, moving into riskier areas of the mortgage business in search of higher returns.

Within weeks of the government's takeover, several senior executives at both firms left as the new chief executives installed their own teams. More recently, Freddie's treasurer, Timothy Bitsberger, who, a source said, privately argued that the company shouldn't expand its portfolio of mortgages in the face of a collapsing market, resigned. Bitsberger, a former Treasury official and Wall Street trader, declined to comment.

Other executives with experience in the mortgage market would also like to leave because the companies are no longer the high-flying finance houses they once were, according to current and former executives. But these senior employees are staying because the companies have put in place cash retention programs and there are no jobs to be had on Wall Street.

One source of tension inside the firms was the decision by their new chief executives to cancel a planned increase in the fees that Fannie and Freddie charge when they buy mortgages from lenders, bundle them, guarantee them against default and then sell them to investors. The fees would have been passed on to borrowers, increasing the cost of home loans. Some at Fannie and Freddie argued the fees were necessary given the losses the companies were facing.

"They were thinking about it from an economic standpoint. They made a strong case that it would maximize their profits," Lockhart said. "On the other hand it would have been the wrong thing to do for housing market."

Lockhart urged that the fee increase be canceled, and the companies ultimately closed ranks around this position.

What the companies ought to be doing under government control has at times been perplexing. Initially, the Treasury tapped Fannie and Freddie to help run a program buying troubled assets from banks and other financial firms, according to two people familiar with the matter. Then, the Treasury abandoned the effort in favor of injecting capital into banks.

No initiative has been more illustrative of the shift at the companies than their efforts to prevent foreclosures. When the government took over Fannie and Freddie, neither Lockhart nor Treasury Secretary Henry M. Paulson Jr. mentioned combating foreclosures as a goal.

At the time, the government wanted Fannie and Freddie to pump cash into the mortgage market with the hope of reducing interest rates. The accelerating crisis in the financial markets this fall made that very difficult by undermining Fannie and Freddie's efforts to obtain affordable financing.

Last week, in an acknowledgment that Fannie and Freddie couldn't fix the home loan market by themselves, the Treasury and Federal Reserve announced a $500 billion program to buy mortgages, which has already helped lower mortgage interest rates.

Weeks before that announcement, with the firms' efforts to buy mortgages running into trouble because of the financial crisis, Fannie and Freddie's agenda was already focused on preventing foreclosures.

In mid-November, Lockhart made a high-profile announcement that Fannie and Freddie would establish a new program to modify mortgages. The program targets borrowers who are three months late on their payments. These borrowers would have their mortgages modified so that their monthly payment equals 38 percent of their income -- by extending the loan term to 40 years, reducing the interest rate and even delaying payment on part of the principal.