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Mortgage giants’ fate unclear

US weighs value of huge subsidies

By Alan Zibel
Associated Press / August 10, 2010

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WASHINGTON — Keeping Fannie Mae and Freddie Mac in business will cost taxpayers billions. But getting the federal government out of the mortgage business would cost home buyers dearly, in the form of higher interest rates.

The Obama administration will begin tackling this dilemma next Tuesday at a public conference on the future of the mortgage system. Fannie and Freddie lost a combined $9 billion in the April-to-June quarter and have needed more than $148 billion to stay afloat since the government rescued them nearly two years ago.

Figuring out what to do with Fannie and Freddie could take years and involves a more difficult question: How much should the government do to subsidize the housing market?

The government has helped make mortgages attractive to Americans for decades with a range of policies, from allowing homeowners to deduct mortgage interest payments to backing loans that make long-term fixed-rate mortgages widely available.

Now, Fannie and Freddie are facing scrutiny for the billions that taxpayers have covered for the bad loans made during the housing boom.

And the administration and Congress are under pressure to address Fannie and Freddie’s role in the mortgage crisis after leaving them out of the broader financial regulatory overhaul.

Without the government’s backing, banks would prefer not to make loans that leave interest rates fixed for more than five years. They don’t want to take the risks that interest rates will skyrocket, leaving them with an unprofitable loan a decade later.

Fannie and Freddie buy home loans from lenders, package them into bonds with a guarantee against default, and sell them to investors. They collapsed two years under the weight of soaring foreclosures and defaults.

There are numerous ways to restructure the mortgage system, ranging from a fully privatized system to one controlled by the government.

Here is a look at some of the options:

■ A fully private system: Fannie and Freddie would be eliminated and private lenders would take over, either holding loans on their books or selling mortgage bonds. But the market for mortgage securities issued without any government backing has been virtually dead ever since the housing bust. It’s unclear whether it can come back.

■ A semi-private system: Fannie and Freddie would be dissolved. Their functions would be assumed by private companies, which would apply for permission to issue government-backed mortgage securities. They would pay the government for the ability to do so, creating a government-run insurance fund to absorb losses if the market went bad.

■ A hybrid system: Fannie and Freddie would continue to exist, but would compete against other companies that would issue government-backed mortgage securities.

A government-run system: Fannie and Freddie would be folded into the government. This option is unlikely because it would further balloon the already-expanding federal debt.