Monday, Jan. 05, 2009

Fannie and Freddie Takeovers

Grade: D

The Plan: In early September, the government placed mortgage guarantors Fannie Mae and Freddie Mac into conservatorship, saying the move would lower mortgage rates, stem foreclosures and help relieve the financial crisis.

The Result: Taking over Fannie and Freddie did protect two institutions that are vital to the nation's mortgage market. But it has explicitly exposed the government to trillions in losses. Fannie and Freddie insure about half the $11 trillion mortgage market. And the action has done little to bolster the mortgage market. Loan rates continued to climb through the fall and hit a high of 6.5% on a standard 30-year fixed mortgage in late October, about a quarter point higher than they were when Fannie and Freddie were taken over. Foreclosures also continue to climb.

Worse, government officials have basically run Fannie and Freddie as is, doing little to reform the system that got them into trouble in the first place. "They had the opportunity to rethink the way these companies are run, and they didn't do anything about it," says Vincent Reinhart of the conservative-leaning think tank American Enterprise Institute and a former chief economist for the Federal Reserve.