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A Times Editorial

Mortgage takeover a sensible first step

The federal government had little choice but to seize control of mortgage finance giants Fannie Mae and Freddie Mac. The two companies, which hold or guarantee about half the nation's mortgage debt, were stretched to the point that their weaknesses were shaking the already unstable financial markets and threatening to expand the mortgage crisis. The cost to taxpayers will be in the billions, but the cost of doing nothing would have been higher.

Sunday's move should instill some immediate confidence in housing and banking. But there is no assurance that having the federal government assume such a direct hand in the market will ease housing woes or the credit crunch in the long term. The stakes are particularly high in states like Florida, where the loss of billions in paper worth from the bursting housing bubble has cost too many their homes and jobs and forced state and local governments to cut services.

The plan unveiled by Treasury Secretary Henry M. Paulson Jr. places the companies in government conservatorship. The two companies' chief executives were replaced; the government committed new capital of up to $100-billion for each company; and it put into place new governance and ethics rules that make Fannie Mae and Freddie Mac operate more directly as government enterprises. In essence, the government is buying debt that it implicitly backed in exchange for taking over an operation that is undercapitalized to serve its mission: to expand home ownership. The hope is that the move will restore confidence in the credit markets and free up lending, which could lower interest rates and make it cheaper to buy or refinance a home. Some cash-strapped borrowers might avoid foreclosure or bankruptcy.

Fannie and Freddie abused their cheap access to money to grow their investment portfolios and offer stockholders higher returns. They enriched their chief executives, used their clout with Congress to thwart any attempt to tighten their business practices and relied on accounting tricks to disguise the depths of their problems. At least the federal bailout will not bail out the companies' shareholders, and it should end the waste of tens of millions of dollars for lobbying services. The Treasury also hopes to shrink Fannie and Freddie's role in mortgage lending by tapping new capital and spreading the risk in the credit markets.

The takeover has financial and philosophical implications, and presidential candidates Barack Obama and John McCain need to speak to them in more detail. Fannie and Freddie have a central role in making home ownership affordable. But that goal is not a blank check. The government, whose lax oversight helped get us here, needs to better protect taxpayers who now will be stuck with the bill.

Mortgage takeover a sensible first step 09/08/08 [Last modified: Wednesday, September 10, 2008 7:24pm]
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