A mortgage rescue

Our view: A federal bailout of Fannie Mae and Freddie Mac may be necessary to set the stage for a housing recovery

August 29, 2008

A credit crunch that has choked off mortgage funding for millions of Americans, forced thousands of homeowners into foreclosure and placed hundreds of banks and investment firms in jeopardy appears unlikely to ease until a continuing crisis at Fannie Mae and Freddie Mac is resolved. An early resolution of the crisis is an urgent priority.

The two quasi-public corporations holding or insuring roughly half of all the home mortgages in the nation have reported losses in the billions stemming from the subprime mortgage crisis and the subsequent credit crunch and housing slump. Their losses and increasing difficulty in raising needed capital present a serious challenge for regulators. Congress passed legislation this summer authorizing a possible bailout. Keeping these companies afloat to the benefit of their private shareholders could cost taxpayers hundreds of billions of dollars. That's a politically unpalatable possibility, but allowing them to fail is not an option either because it could trigger a global financial crash.

The best course of action under the dire circumstances would be an early bailout that frees up fresh credit for mortgages and that limits costs to taxpayers and shares the pain with Fannie Mae and Freddie Mac's private shareholders.

Regulators and political leaders are headed in that direction. The plan might involve the government buying billions in new issues of preferred company stock that would pay dividends and eventually be retired. The two companies could fulfill their obligations to other investors around the world and provide credit funding badly needed to revitalize the slumping U.S. housing market.

Sen. John McCain, a longtime critic of Fannie Mae and Freddie Mac, believes the companies' current management and boards of directors should be dumped if a bailout is necessary. Sen. Barack Obama, his Democratic opponent in the presidential race, says the government may soon be forced to decide whether to make the two either wholly public or private institutions.

For homeowners, the status quo is increasingly challenging. Maryland home values fell 4 percent in April through June compared with the same period a year earlier - the seventh-largest drop in the country. And that's just the homes that sold. More serious housing slumps are plaguing other regions, particularly in the South and West.

Making more money available for affordable new mortgages won't, in itself, end the continuing decline in home values. But it is a necessary condition for recovery, and providing it requires confronting the challenge of these wounded mortgage giants.

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