Fannie Mae and Freddie Mac, two mortgage lending giants that hold or guarantee about half of the nation's $12 trillion mortgage market, took a beating on Wall Street last week, raising fears of the biggest financial crisis yet for the nation's battered housing market. That danger demands continuing short-term oversight by regulators to ensure the stability of these pivotal financial institutions and long-term reforms to reduce their influence.
The companies' stock values plummeted after questions were raised about their financial stability. Washington policymakers found themselves considering contingency plans for a takeover that could effectively double the size of the $9 trillion national debt, dry up vital sources of mortgage lending capital and force write-downs of the value of billions in Fannie Mae and Freddie Mac bonds held by banks, other financial institutions and individuals.
Federal Reserve Chairman Ben S. Bernanke came to the rescue Friday when he reportedly told Freddie Mac CEO Richard F. Syron that the two government-sponsored enterprises could access the Fed's emergency lending window. In response to that good news, the stocks staged a modest rally. Treasury Secretary Henry M. Paulson Jr. dismissed the idea of a government takeover and said he would keep talking with the companies to ensure their continued independent operation. But the fear of instability still hangs over the troubled housing market, sending prices lower and dampening the broader economy. Congress should quickly pass pending legislation that would offer financial aid to some of the 2.5 million homeowners facing foreclosure and more closely regulate the two mortgage giants. A broader bill promising tighter rules on mortgage lending should follow.
In the long run, serious consideration should be given to turning Fannie Mae and Freddie Mac into normal private-sector companies. That would require stripping them of the charters that imply government guarantees and breaking them into smaller pieces. Their size and vulnerability represent too large a danger.