Fannie, Freddie seen as white knights?

The Fannie Mae building in Washington, D.C.

TEXT OF STORY

TESS VIGELAND: Fannie Mae and Freddie Mac have endured punishing headlines the last few years. They barely weathered a massive accounting scandal. New York attorney general Andrew Cuomo is now investigating whether Fannie bought up mortgages that were based on inflated home appraisals. Congress has been pushing heavier regulation, but that was before the housing bubble popped and the credit crunch hit. Now Washington wants Fannie and Freddie to play white knights.

Jill Barshay reports.


JILL BARSHAY: Mortgage lenders have been stingy about issuing home loans since credit tightened back in August. The Bush Administration wants Fannie Mae and Freddie Mac to step in and raise more money to buy more mortgages. Diane Swonk is chief economist at Mesirow Financial. She says the government is scaling back a plan that would have made Fannie and Freddie get permission to issue debt four times a year.

DIANE SWONK: It's a 180 degree turnaround from where Washington was at the earlier part of this decade, trying to clip the wings of Fannie and Freddie Mac because they felt they were getting too big for themselves.

The hope is that mortgage lenders will issue new home loans with the money they get from Fannie and Freddie.
Karl Case is a housing economist at Wellesley College.

KARL CASE: It's certainly true that there's a lack of credit for people with reasonably good credit standards at the bottom end of the income distribution, and this will provide some resources to get those people into houses.

But Case says banks might just use the proceeds to clean up their balance sheets instead of issuing more mortgages, and then there's the danger, he says, that Fannie and Freddie could get knocked down by the housing crisis.

CASE: If they're borrowing money to put into mortgages and the mortgage market declines further, or this thing spreads further than it's even spread now, then it's in jeopardy. So there's certainly a risk involved.

Both Fannie and Freddie are government-sponsored enterprises. That means there's an implicit promise taxpayers will bail them out if they run into trouble.

In New York, I'm Jill Barshay for Marketplace.

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