Despite crisis, Freddie, Fannie serve a purpose

WASHINGTON -- As soon as I heard about the federal government's takeover of Fannie Mae and Freddie Mac, I began wondering what this will mean for homeowners long-term.

First, to fully understand the importance of these two companies and their bailout, you have to appreciate how they helped millions of people become homeowners.

Fannie and Freddie don't directly lend money to individuals. Instead, they were created to establish a regular flow of money to lenders who actually make home loans. The institutions buy loans from mortgage lenders -- commercial banks, savings institutions and credit unions -- and that in turn allows those institutions to make additional home loans.

Fannie Mae was created in 1938 during the administration of President Franklin D. Roosevelt when millions of families couldn't afford to buy a home. Freddie Mac came along 32 years later.

The two institutions were chartered by Congress as government-sponsored enterprises, or GSEs, and had an implicit guarantee from the government that they would not fail. Now we see that the implicit guarantee has become an actual guarantee.

In 2007, the two companies reported a combined loss of just under $5.2 billion, according to a Congressional report. Until then, they had not reported a combined loss since 1982.

To prevent a crushing blow to the housing market, the federal government stepped in to bail the companies out.

So what now?

Well, weep if you own stock in the company -- either in an individual portfolio or, for many investors, in a mutual fund. But of course you've probably already been crying or cussing if you knew you held the stock in these two companies.

Fannie Mae's stock has steadily declined from a 52-week high of $68.60 to a close of just 73 cents on Sept. 8, the day after the Treasury Department announced the federal bailout. It's been a similar bungee drop for Freddie Mac, whose 52-week high was $65.88. The stock closed on the Sept. 8 at 88 cents.

Fannie and Freddie's financial problems don't pose a risk if you aren't planning to sell your home anytime soon or you don't want to refinance. That's because you don't have to worry about mortgage rates. And the bailout doesn't affect your existing mortgage, so you should continue to pay it as agreed.

However, if you're in the market to buy, or need to refinance, you may find rates slightly lower due to news that the two institutions have been rescued.

But the larger question is: Should Fannie and Freddie continue to exist at all?

Absolutely, says economist James K. Galbraith, the Lloyd M. Bentsen Jr. chair in government and business relations at the University of Texas.

The government bailout is a good thing, said Galbraith, the author of "The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too."

"It's hard to see how it could have been avoided," Galbraith said. "These institutions created American homeownership as we know it. They created a flow of money to the housing market. All of us who are homeowners will be high and dry if this function gets taken away."