The Spectacle Blog

Fannie and Freddie Fears

By on 7.11.08 | 10:59AM

In my column today, I contemplate the worst case scenarios presented by an Obama administration, but there aren't many things he could do that would be more frightening than this:

Shares of Fannie Mae and Freddie Mac, the beleaguered mortgage finance companies, were poised to plummet again on Friday morning, as senior Bush administration officials consider a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, according to people briefed about the plan....

Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee -- which could be staggering -- would be paid by taxpayers.

The government officials said that the administration had also considered calling for legislation that would offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies. But that is a far less attractive option, they said, because it would effectively double the size of the public debt.

Emphasis mine.

This is a scary example of creeping socialism. When they were created in 1970, Fannie and Freddie were granted a relatively modest $2.25 billion line of credit from the government. Though they have never dipped into it, the implicit government backing has allowed them to finance bond purchases at cheap rates. The whole idea was to boost home ownership by spreading risk around so that mortgage lenders were more comfortable issuing loans knowing they would be backed by Fannie and Freddie. Of course, what this translated into was companies issuing loans to people who weren't credit worthy enough, and instead of risk getting spread out, it actually became heavily concentrated into these two companies.

While neither of these mortgage financiers loan money directly to consumers, they hold the bundled mortgages from the companies that do, and as a result own or back more than half of the nation's $12 trillion in mortgage debt. Nationalizing their debt, on top of the tremendous potential costs involved, would mean the federal government ultimately owning a massive portion of American homes.

John McCain, sadly, has already come out in favor of some kind of bailout for Fannie and Freddie.

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