Fannie Mae and government housing solutions

There is more than a little irony in two news stories circulating early this morning. First, AP reports that Fannie Mae, the nation's largest government sponsored mortgage lender, lost a cool $3.6 billion last quarter due to mounting loan delinquencies.

The government-sponsored company was forced to set aside billions to account for bad loans. Its results clearly showed the ravages of the mortgage-market turmoil that began last spring and rattled the economy.

Because Fannie customarily buys more solid mortgages as opposed to the high-risk subprime loans that have mushroomed into default, the latest losses show how pervasive the mortgage crisis has become.

Ultimately, the U.S. government is on the hook for what Fannie Mae does since, like Freddie Mac, they have an "implied" government guarantee. By the looks of it, both Fannie and Freddie will be asked to do a lot more to help the nation's housing market in the year or two ahead, though, in the scheme of things, three or four billion dollars doesn't sound like a lot of money anymore.

Then, this story in the Washington Post explains the current rift between the White House and Congress on what to do about the current housing and mortgage mess.

Congressional leaders yesterday gathered support for aggressive changes to bankruptcy laws that would help troubled homeowners, even as the Bush administration threatened to veto the plan and emphasized its opposition to any program that would risk tax dollars.

Democrats are calling for the government to do more than what the administration has done to date. They propose a range of initiatives that include the purchase of troubled mortgage securities by a federal agency and the empowering of bankruptcy judges to change the terms of high-interest loans held by homeowners facing foreclosure.

But the administration said that changing mortgage terms retroactively for a select group of troubled borrowers would only add to lenders' woes and lead to higher mortgage rates for everyone.

The clash highlighted the sharp differences between Democrats and the Bush administration over how to solve the nation's worst mortgage crisis since the Great Depression.

"Homeowners at risk of foreclosure are floating 50 feet from shore, and the Bush administration has thrown them a 30-foot rope," said Sen. Richard J. Durbin (D-Ill.), the author of a proposal that would allow bankruptcy judges to change the interest rates on subprime, adjustable and other nontraditional loans for homeowners facing foreclosure.

If only elected officials and government regulators would have been half as active a few years ago, back when this whole mess was developing, we surely would not be where we are today.

Their only notable achievement around the time that the housing bubble was at its bubbliest was to move a large portion of debt securitization from Fannie Mae and Freddie Mac over to Wall Street firms because the GSE's regulator couldn't figure out what the heck was going on.

As we know now, this resulted in turning a risky business practice into a virtual Wild West.

Let's hope that whatever they do now is less disastrous than their 2004-era efforts.