This week, TheStreet and RealMoney will be exploring the aftermath of Lehman Brothers' bankruptcy filing and the ensuing market chaos it brought to a head almost a year ago.



) -- Lawmakers, regulators and Wall Street have waged a very public battle over financial sector regulatory reform, but ask about

Fannie Mae


Freddie Mac

, and a chorus of crickets begins to chirp.

The two mortgage-financing giants were taken over "temporarily" by the government over a year ago to foster stability in the housing market, to provide liquidity in the mortgage market and to put the firms in "a stronger position" to operate as the government saw fit.

While some of that has occurred, Fannie and Freddie are in a worse position than they were before being placed into conservatorship on Sept. 7, 2008. There's still no clear resolution for handling their mounds of bad debt, nor is there a comprehensive, long-term plan for mortgage finance in the U.S.

"I don't hear much down here in Washington about what's going on," says Jeffrey Curry, a former official at Fannie and Freddie's regulator, the Office of Federal Housing Enterprise Oversight. "But what I've heard is there's no way that Fannie and Freddie are going to be private companies again."

Ultimately, the new Fannie-Freddie model will probably not include shareholders, though the firms still trade on the

New York Stock Exchange

today. The new structure will likely include some type of public entity that provides explicit support for mortgage bonds, rather than the implied guarantee offered by the "government-sponsored enterprises" or GSEs.

Now Congress and the Obama administration are tasked with coming up with specifics that minimize risks to taxpayers while maximizing stability and liquidity in the housing market.

"There will always be government support for housing. The question is, what shape it will take?" says Howard Altarescu, a partner at Orrick, Herrington & Sutcliffe, who specializes in mortgage finance. "I don't know what is politically feasible in this environment."

A sweeping regulatory reform proposal unveiled by the Obama administration in June included a short blurb on the future of GSEs. It was sparse on details, and the president doesn't foresee having a definitive framework to present to Congress until the 2011 budget is due.

The blurb outlined six potential options for Fannie and Freddie: Return to a public-private hybrid structure and go about business as usual

(popular wisdom: not happening)

; liquidate their assets and dissolve into nothing

(then what?)

; combine forces into an outright federal agency, or a public utility with regulated profit margins

(not if industry groups holding political purse strings have any say)

; shift the market to

covered bonds, popular in Europe, by providing insurance for them

(sounds good, but lacks broad interest and understanding by U.S. market -- and what would become of the old loans?)

; or split up into a bunch of smaller companies that provide the service they do now

(how this solves anything besides the "too big to fail" issue is not clear)


The Obama team is working with regulators and seeking public input on the various proposals. Meanwhile, House Republicans have crafted their own proposal that would gradually remove taxpayer support and either place Fannie and Freddie into receivership if they're still not viable, or break them up into smaller, wholly private entities if they are.

Rep. Rep. Jeb Hensarling (R., Tex.) of the House Financial Services Committee advocates the plan as one that would "transition our secondary mortgage market away from government-sanctioned monopolies and back towards free market competition." But with a Democratic majority, a Democratic president and leaders like Rep. Barney Frank (D., Mass) and Sen. Chris Dodd (D., Conn.) still manning the helm, a free market plan is unlikely to get far off the ground.

The mortgage industry unveiled a more realistic proposal this month, to much fanfare. It would wind down Fannie and Freddie and replace them with a few entities that back loan products created by private originators. The new entities would operate in a similar fashion to Ginnie Mae, which typically guarantees loans issued by the Federal Housing Administration and Department of Veterans Affairs.

The plan has broad support from the private sector, having been constructed by senior executives at

Bank of America

(BAC) - Get Report


Wells Fargo

(WFC) - Get Report


JPMorgan Chase

(JPM) - Get Report


US Bancorp

(USB) - Get Report



(BBT) - Get Report



(PNC) - Get Report



(MET) - Get Report

, among others.

While being led by the government, Fannie and Freddie lost a combined $98 billion over three quarters and required $95.6 billion in direct taxpayer support. The Treasury Department had to double its initial federal credit line of $100 billion as a result.

Those amounts don't include the $1.25 trillion in Fannie and Freddie mortgage-backed securities that the

Federal Reserve

will have bought by year-end to help finance their operations.

"Both of the GSEs will be beholden to the federal government for many years to come," notes Kevin Petrasic, a senior banking lawyer in the Washington office of Paul, Hastings, Janofsky & Walker.

The federal government's actions -- combined with 130,400 mortgage modifications performed by Fannie and Freddie to keep borrowers in their homes -- have lent tremendous support to the fragile housing market in a time of crisis.

"Without the federal backing, there would be no housing market right now," says Joe Murin, managing director of The Collingwood Group, who resigned from his position as president of government mortgage guarantor Ginnie Mae last month.

But the federal initiatives also changed Fannie and Freddie permanently, giving the government an opportunity to address what former Treasury Secretary Henry Paulson called an "inherent conflict and flawed business model" that was plagued by "ambiguities."

But there is no longer any ambiguity about the owners and operators of Fannie Mae and Freddie Mac. Once upon a time, they were public-private hybrids, pursuing profit for shareholders while enjoying the perks of implied federal support. Now they owe their existence to taxpayers, and that's whom they're destined to serve.

Curry, the former OFHEO official who is now a managing director in the Washington office of consulting firm LECG, notes that taxpayers have been funneling all that money into Fannie and Freddie, with no end in sight. There's little likelihood their future earnings streams can pay off those debts within a reasonable time frame.

"Nobody really knows how big the hole really is at Fannie and Freddie yet," says Curry. "They're trying to get to the bottom of the

housing problem still, so to talk solutions that have a longstanding impact is a little premature."

-- Written by Lauren Tara LaCapra in New York