Fannie Mae and Freddie Mac, collectively known as the government-sponsored enterprises or GSEs, are huge government-backed yet privately owned companies whose main purpose is to buy mortgages. They are also, according to a recent Fed governor among others, insolvent — that’s “broke” to you and me.

This story is all over the news so I’m not going to rehash it — here’s a NY Times piece for those who want more. I just wanted to note that this is a huge crossroads for the housing and mortgage finance bailout efforts about which I’ve written several times on these pages.

A failure of the GSEs would be huge. They either own or guarantee over $5 trillion worth of mortgages, accounting for nearly half the mortgage debt in the country. And in the days of dwindling private mortgage issuance, the GSEs provide a huge chunk of the lending that takes place. Were they to stop buying mortgages, as the Times article puts it, it “could bring much of the American housing economy to a standstill.” Many think that the government would step in and take over the companies before that was allowed to happen.

Treasury Secretary Hank Paulson was out this morning implying that there won’t be a wholesale bailout or takeover of the GSEs. But as I suggested in an article back in April, if the government is willing to bail out the creditors of a mid-level investment bank like Bear Stearns, there is no way they will allow the enormous GSEs to fail.

A government takeover of the GSEs would really amount to nothing less than the nationalization of the U.S. mortgage industry. It would also amount to yet another taxpayer bailout of financial institutions that took enormous risks and made commensurately enormous profits before the good times ended.

I will end with some previous quotes from some of the folks who may even now be gearing up to effect said bailout:

“[House] price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas.” — Fed Chairman Ben Bernanke, Oct. 20, 2005

“[The housing downturn] looks to be a very orderly and moderate kind of cooling.” — Fed Chairman Ben Bernanke, May 18, 2006

“All the signs I look at [show] the housing market is at or near the bottom.” — Treasury Secretary Henry Paulson, April 20, 2007

“I don’t see [subprime mortgage market troubles] imposing a serious problem. I think it’s going to be largely contained.” — Treasury Secretary Henry Paulson, April 20, 2007

“Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.” — Fed Chairman Ben Bernanke, May 17, 2007

Happy Friday, everyone.


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