Bill in Brief

Before the housing market started trembling, Congress was looking at ways to tame Fannie Mae and Freddie Mac, the "government sponsored" companies that have fueled the housing market, but which - some have long feared - were on fiscally shaky ground. This year, things got confused - with Fannie and Freddie first becoming part of the rescue posse to help prop up defaulting mortgages - and then, with the strains on the housing market sending both lenders into financial free-fall.

Now Congress and the admistration are working in three directions: Congress is still hoping to get some regulatory reins on two companies (and should do so as part of a mega-housing bill working through Congress) while at the same time it is loosening their leash on the mortgages they can cover. The fed - and Congress - meanwhile may have to go to extreme measures to keep the two institutions from total collapse.

What are Fannie and Freddie?

Though most homemakers probably have never heard of Fannie and Freddie, these two "government sponsored entities" - or GSEs - are thought to play a large part in America's boom in homeownership.

Set up by the government - but run privately - GSEs have been in the business of backing mortgages since 1968. Like any re-insurer that backs up loans, they make it easier for banks to issue riskier mortgages at lower rates. That means more mortgages for more families. Today Frannie and Freddie either own or back up 41% of home mortgages (Congress Daily).

What's the fuss?

In 2003, both Fannie Mae and Freddie Mac found themselves in hot water when the feds accused them of improper accounting - in the $9 billion range. This led to the resignation of both the chief executive of Fannie Mae, Franklin Raines, and chief financial officer of Freddie Mac, Timothy Howard.

As if that financial hanky-panky wasn't enough to worry lawmakers, some economists warn that Fannie and Freddie deserve special attention because of the shaky ground they sit on. Here's the idea: those economists say Frannie and Freddie do as well as they do because, although they're not government agencies, the market treats them like they're part of the government. Everyone knows that if Frannie and Freddie crumble, the feds will bail them out. That makes it safer to dole out riskier mortgages - but it also creates a mini housing bubble of sorts. In other words, the feds will probably rescue Fannie and Freddie if they crash, but knowing that the feds will do so increases the chances of creating a market bubble that will make them crash. (See this Washington Post article for more on their unique status and risk.)

To make sure Freddie and Fannie didn't go the way of Savings & Loans (the 80's Enron, which got bailed out by the feds), lawmakers are pushing a plan to give regulators more power to keep the GSEs on financial firm ground.

What Congress is proposing

Bills considered in the House and Senate over the past few years - but not yet passed - would replace the GSE's current regulator with a stronger independent agency.

That agency would have more direct say-so over Fannie Mae and Freddie Mac, capping their investments and setting clearer limits - known as the "bright-line" - between the primary mortgage market, which the GSEs must keep out of, and the secondary mortgage markets, which should be their focus.

Bills have also proposed setting up an "affordable housing fund" out of Freddie and Fannie's profits - as well as expanding their portfolio caps by 10%, mostly to refinance subprime loans.

Status. The House passed a GSE-tightening bill lin '07, HR 1427, which may become part of a larger housing bill in '08. At the same time, responding to the credit crisis, Congress has has temporarily let Freddie and Fannie cover more expensive homes and hold less cash in its coffers - which, to cJ's unschooled mind, seems like mixed signals. (See Housing Jitters for more.) If the administration's efforts in July to cool market fears over the two GSEs don't pan out, radical "bail-out" measure could be called for. (WP)

More reading

• from the Washington Post on the underlying risks, and Congress' solution.

• a backgrounder of the "What, Why and How?" from the CBO

• a May '08 NYTimes article explains why some are still concerned about Freddie and Fannie

Updated July 11, 2008

Did we miss something, let some slant slip in, lose a link - or do you just have something to say? Drop a line below! In the spirit of open dialogue, cJ asks you keep it civil, keep it real and keep it focused on the message, not the messenger. See our policy page for more on what that all means.