If takeover tanks, we're holding bag

The seizure of mortgage giants is taxpayers' risk

WASHINGTON -- President Bush's "ownership society" was never supposed to come to this.

With the government takeover of Fannie Mae and Freddie Mac, U.S. taxpayers now essentially own the bulk of the nation's mortgage market.

This ownership could even lead to a big increase in the national debt -- to $15 trillion, up from just under $10 trillion now -- if things don't work out as planned.

The government's forced rescue of the mortgage finance giants over the weekend could have many unintended consequences, even though those in both parties -- including the presidential nominees, Republican John McCain and Democrat Barack Obama -- have greeted it as a necessary evil toward easing the nation's housing and credit woes.

If all goes as planned, it should help make home loans cheaper and more readily available. It also may slow the rate of foreclosures and possibly halt house price depreciation. But that's a big maybe.

The deal -- one of the government's most aggressive market interventions in decades -- puts the long-term fate of the two mortgage companies in the hands of the next president and Congress.

It has refocused political attention on the frail U.S. economy, with both candidates and their running mates back on the campaign trail talking about the economy after their respective nominating conventions, and with Congress returning to town for at least a three-week session.

"These companies are so big and so interwoven into the financial markets and our financial system, we had no choice," Treasury Secretary Henry Paulson said Monday in a round of TV interviews. "A failure by either one of these companies would cause great havoc in the economic system."

Paulson said he could not yet estimate the potential burden for taxpayers.

Another S&L situation?

For now, U.S. officials are trying to emphasize the temporary nature of the takeover and minimize the possible risk to taxpayers.

But some economists say it could take years to work though the nation's housing problems. By then, the takeover could even dwarf the savings and loan crisis, when the failure of more than 700 S&Ls in the 1980s and early 1990s cost taxpayers some $125 billion.

"I think this is a bigger financial crisis, said Mark Zandi, chief economist of Moody's Economy.com. "Instead of nationalizing an industry like the S&L industry, we've effectively nationalized the mortgage market."

Fannie, Freddie and the Federal Housing Administration now account for backing or issuing roughly three-quarters of the nation's mortgages, with commercial banks playing a decreasing role since the start of the housing-credit crisis.

For a Republican administration that has favored market remedies and less government intervention, and once boasted of an "ownership society" with more individual ownership of private homes, retirement savings accounts and health care policies, the takeover of Fannie and Freddie has been a stark return to a far heavier federal hand on markets.

It follows the government-sponsored sale of investment bank Bear Stearns to J.P. Morgan Chase in March, with the Federal Reserve agreeing to guarantee $29 billion of Bear Stearn's assets; the administration's proposals that the Fed be given a beefed up role in regulating financial markets, and earlier government efforts this summer to prop up Fannie and Freddie.

And even more government intervention could be down the road, including possible additional help for the U.S. auto industry and tighter regulation of the credit-card industry.

President's warning

President Bush did urge Congress earlier in his presidency to rein in Freddie and Fannie after an accounting scandal, and subject them to some of the kind of controls and capital requirements that apply to commercial banks.

White House press secretary Dana Perino made note of that on Monday, telling reporters, "Remember that we have highlighted the systemic risk posed by Fannie Mae and Freddie Mac because of the very large role they play in housing markets and because of their business practices."

But most housing experts generally say the problems that brought down Fannie and Freddie were deeper than the type of regulation that was imposed over the two organizations.

While tighter regulation would have perhaps kept the two institutions from engaging in some of the riskier practices, the two also were dealing in a highly unstable housing environment.