Fannie and Freddie: Who’s rescuing whom?

The federal government's takeover of Fannie Mae and Freddie Mac has boosted confidence in the mortgage and housing markets, but those who borrowed responsibly during the housing bubble may have to cover for those who did not.

There are two ways to look at the federal government’s multibillion-dollar takeover of mortgage-backers Fannie Mae and Freddie Mac, said David Lazarus in the Los Angeles Times. The “conventional wisdom” says that the government-sponsored behemoths—which guarantee more than half of the country’s $12 trillion in mortgage debt—are “just too big to let fail.” Among other things, the takeover ensures that new home-buyers will be able to get loans, “thus preventing the housing market from tanking further.” But some believe the arrangement will have the effect of letting homeowners who borrowed too much off the hook: “All those of us who behaved responsibly during the housing bubble will now have to cover for those who rolled the dice and lost.” Current estimates put taxpayers’ share of the tab at $200 billion. “That’s about $655 for every man, woman, and child.”

At least the Treasury department’s fast action is giving the mortgage market a much-needed boost of confidence, said Martin Crutsinger in the Associated Press. In the week following the move, interest on a 30-year fixed-rate mortgage fell by 0.42 percentage points, to 5.92 percent, according to Freddie Mac’s weekly survey of rates. That’s the fastest drop in 28 years. Indeed, lower interest rates are “the most significant positive benefit of the government takeover,” says Mark Zandi, chief economist at Moody’s He believes that rates could sink to as low as 5.5 percent in the coming weeks.

Falling interest rates may persuade people standing on the sidelines of the housing market to take the plunge, said Ron Lieber in The New York Times. But that’s “probably not enough to halt the decline in home prices anytime soon.” The housing market is also being weighed down by the uncertain job market and gloomy economic outlook, not to mention the “sheer number of homes for sale.” Still, real estate investors will probably benefit more from the government takeover than the companies’ stockholders will. “It is not yet clear whether stockholders in Fannie Mae and Freddie Mac will be wiped out entirely.” But both entities, according to U.S. Treasury Secretary Henry Paulson, will no longer be managed with the goal of maximizing shareholder returns.

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