Bail out or not, you could pay

If the federal government decides to bail out Federal Home Loan Mortgage Corp. and Fannie Mae, two of the nation's largest mortgage firms, then taxpayers could ultimately foot the bill.

If there's no bail out and confidence in the lenders continues to spiral, home buyers and other consumers likely will pay higher interest rates.

Either way, you could pay.

Already, investors are bleeding from share losses of about 75 percent so far this year. As confidence plunges, as it has this week, so will Federal Home Loan Mortgage Corp. and Fannie Mae's ability to raise its own money to provide loans. The ripple effect is enormous and the results could be disastrous, local financial experts said Friday.

"What consumers pay is tied to Federal Home Loan Mortgage Corp. and Fannie Mae securities," said Phil Ashton, assistant professor of urban planning and policy at the University of Illinois at Chicago. "The riskier they are considered from those who would lend Freddie and Fannie money, they (lenders) would in turn offer higher interest rates to consumers."

Federal Home Loan Mortgage Corp. and Fannie Mae, which collectively own about $5 trillion worth of mortgages nationwide, has struggled along with the entire housing industry. This includes massive cutbacks within their own operations, as evident in Freddie Mac's lay off 116 workers and closing its Schaumburg office in June. It's Chicago office has about 100 workers, said spokeswoman Sharon McHale.

But the layoffs were only the tip of the iceberg for the beleaguered Federal Home Loan Mortgage Corp. as well as Fannie Mae. They've become the only game in town since most other banks and lenders have retreated on many mortgages during the current foreclosure crisis.

"They're running the show now in the mortgage market," said Ashton. "There are few sources of liquidity for banks and lenders, who want to sell their mortgages to them, and get more liquity on their own books."

As the banks tighten their wallets, interest rates go up for mortgages and other loans, he said.

"The upward tracking of these interest rates just feeds into the cycle," Ashton said. "Having Freddie and Fannie in trouble is a dangerous situation for the overall mortgage industry."

Consumers shouldn't worry at all, said Federal Home Loan Mortgage Corp. spokeswoman Sharon McHale.

"They can have confidence that we will remain in the market and provide liquidity," McHale said. "They don't need to worry if we'll be pulling out of the market. We plan to stay."

However, some economists had mixed reactions on whether the trouble firms could ultimately be bailed out. It depends on how a possible bail out is structured, whether private sector funds are included, how government make its implicit guarantees, among other issues, said Diane Swonk, chief economist and senior managing partner for Mesirow Financial in Chicago.

"We are dead in the water and the collateral damage too great to risk if these agencies were to fail today," said Swonk. "The cost to the economy and taxpayers would be enormous, and mortgages and other types of credit would not only become unavailable, but rationed as well. At this stage of the game, we have to work with what we have, and it includes these behemoths, that are extremely imperfect."

There would be no need for a bail out if the Federal Reserve opened its discount window to the two firms. A discount window is where banks or other institutions go to the Federal Reserve to borrow money, said David Klein, senior vice president and financial consultant to RBC Dain Rauscher Inc. in Vernon Hills.

"Even in the worse case and the stock continues to go down, there's no danger to mortgages or to the homeowners," Klein said.

Klein compared the situation to individuals who have certificates of deposits at their local bank. If the bank goes under, the CD is secured up to $100,000 through federal insurance. So if Federal Home Loan Mortgage Corp. or Fannie Mae failed, home mortgages don't fail. So homeowners should not fear losing their homes in such a situation, Klein said.

Still, financial institutions are hurt by such a crisis and could be reluctant to give out mortgages in the future, Klein said.

Rates would increase and mortgages would be harder to get, especially for individuals who don't have sterling credit histories.

"It's a ripple effect," Klein said. "Everyone else has to shore up their balance sheets and lending rates would stay elevated."

Some experts compared the Fannie Mae and Federal Home Loan Mortgage Corp. crisis to the savings-and-loan crisis in the late 1980s and that resulted in a federal bailout.

From an investor standpoint, a Fannie Mae and Federal Home Loan Mortgage Corp. bailout is absolutely needed, said Andrew Stoltmann of Barrington Hills and a Chicago-based securities attorney.

"There are billions invested in the agencies for elderly and fixed income seeking clients," said Stoltmann. "With a triple A-rated debt, the investments were pitched to thousands of investors as one of the safest havens for client cash. The absence of a bailout would lead to cataclysmic losses for investors across the country."