Administration Considers Splitting Fannie Mae, Freddie Mac

The Obama administration launched a broad government effort this week to overhaul mortgage giants Fannie Mae and Freddie Mac and is considering splitting the companies and putting their troubled assets in a new federally backed corporation, administration officials said.

Such an approach would keep the government on the hook for losses into the indeterminate future but would also clear the way for the revamped companies to play a critical role of financing home loans throughout the country.

The move would dispense with one of the biggest burdens created by the financial crisis: the hundreds of billions of dollars in money-losing home loans owned by District-based Fannie Mae and Freddie Mac. The government has already pledged nearly $2 trillion, including $85 billion in direct aid, to keep the mortgage market working through the firms.

The companies' regulator, James B. Lockhart III, director of the Federal Housing Finance Agency, who announced he is resigning Wednesday, confirmed that the administration is discussing the "good bank bad bank" model. He said the discussion was in an early stage. The proposal has appeared in several internal papers on the topic and appeared as part of an agenda for a meeting being hosted Thursday by the White House's National Economic Council.

The administration's discussions on the future of the companies began in earnest earlier this year during the regulatory reform planning process and are just entering a more serious phase now. National Economic Council director Lawrence Summers has long wanted to overhaul the structure of the companies and warned as far back as the late 1990s that Fannie Mae and Freddie Mac posed a threat to the financial system.

The government seized the firms last fall as the financial crisis worsened and has since used them to help reduce interest rates on mortgages generally and to assist borrowers who are at risk of losing their homes.