Future of Fannie, Freddie Still Unclear

Getting out of a bad relationship can be tricky, especially when money is involved. And for the federal government, the billions it has spent to bail out Fannie Mae (Stock Quote: FNMA) and Freddie Mac (Stock Quote: FRE) could very will push it to sever ties with the mortgage finance companies.

“Fixing this system is one of the most consequential and complicated economic policy problems we face as a country,” Treasury Secretary Timothy Geithner said at a conference held in Washington to discuss the future of housing finance. “And I think it's worth stepping back and asking the basic questions: What went wrong over the past few years? And what are the most important flaws in the system that we have to fix?”

Here’s looking at you, Fannie and Freddie.

The companies, which buy mortgages from banks to resell to investors as securities, have carried on a sordid affair with the federal government during the past 50 years. Originally created by the Roosevelt Administration to back mortgages during the Great Depression, Fannie and little brother Freddie were, for a stretch of time, publicly held. During their years on the market, faulty lending practices, bolstered by a need to stay competitive in the housing market, led the firms to amass $5 trillion in debt. This, in turn, forced the government to intercede.

They were taken over by the Treasury at the height of the financial crisis in 2008. Since then, the government has lent both firms more than $150 billion.

While members of Congress and analysts have been decrying the government’s relationship with Fannie and Freddie for years, Tuesday’s conference marks the first time that the Obama administration took a firm stance on the future of the companies.

“It is not tenable to leave in place the system we have today,” Geithner said. “We will not support returning Fannie and Freddie to the role they played before conservatorship, where they fought to take market share from private competitors while enjoying the privilege of government support.”

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