Page 2 of 2   <      

Fannie Mae, Freddie Mac losing political support as U.S. reshapes housing finance system

For most of their existence, the two were odd hybrids: private companies set up by Congress to achieve the public goal of making money widely available for home loans. The companies operate by taking loans made by lenders, pooling them into investments, guaranteeing them and then selling them to the market, providing a stream of money for lenders.

Neither the firms nor the government ever said explicitly that Fannie and Freddie had a federal guarantee, but it was the assumption of most investors and later turned out to be correct. And because the companies were believed to have a government guarantee, they could borrow money at lower interest rates than other private firms.

With that advantage, Fannie and Freddie grew huge and focused on enriching their shareholders and well-compensated executives. In search of profit, they began buying and insuring excessively risky loans during the past decade, and ended up needing a bailout to survive.

Even as a consensus seems to be emerging over the fate of Fannie and Freddie -- at least among those who responded to Treasury's survey -- deep and broad differences remain over housing policy.

Groups that advocate for affordable housing are urging that any new housing finance system channel more money to rental housing. The funds would come out of the profits of housing companies and charges paid by mortgage borrowers.

"If we are going to have a strong housing market, any other financial institution that is generating revenue and is somehow backed by the federal government should have to do something that results in greater public benefit," said Linda Couch, deputy director of the National Low Income Housing Coalition.

Couch added that she thinks the administration is receptive to that idea.

"The administration is not only clearly interested in preserving the affordable housing that we have but is open to other ways to expand inventory of units assisted with public dollars," she said.

But new efforts to ramp up government support for affordable housing could run into opposition from the financial industry and conservatives. Skeptics say that the government's drive in recent years to foster affordable housing prompted Fannie and Freddie, as well as banks, to make risky loans to borrowers with thin credit histories.

"Having specific affordable-housing goals imposed on that system has the ability to distort the system and have a damaging effect," said Berman of the Mortgage Bankers Association.

<       2

© 2010 The Washington Post Company