Facing an array of more immediate financial problems, Treasury Secretary Timothy Geithner has pushed Fannie Mae and Freddie Mac towards the bottom of his to-do list, even as they continue to amass billions of dollars in losses on the government's tab.
But some finance experts and lawmakers argue that time is wasting as the taxpayer's burden grows.
The government rescued the two mortgage finance giants from the brink of collapse last year, replacing their chief executives and allowing each to tap a $200 billion line of federal credit to cover losses on delinquent and foreclosed mortgages. Meantime, Treasury is using the companies to help prop up the housing market. A new federal rule will allow homeowners who have kept paying their Fannie or Freddie mortgages to refinance even if they are underwater, meaning they owe more than their house is worth.
While helping homeowners, the loosening of loan standards could produce more red ink at the companies. Fannie alone lost $23 billion last quarter while Freddie lost nearly $10 billion.
"In the end, everything they lose is going to be accrued to us," said Marvin Phaup, a former analyst at the Congressional Budget Office and an expert on Fannie and Freddie.
"The default option is don't do anything until you have a crisis," said Phaup, now a professor at George Washington University's School of Public Policy. "That's a bad idea-you don't want them running up big losses in the meantime."
Although Geithner has described Fannie and Freddie as "a core part of what went wrong in our system," they were absent from President Obama's financial regulatory overhaul plan announced last month and Geithner recently told Congress that he has no immediate plans to overhaul them or cut them loose. "We want to [reform Fannie and Freddie] carefully and well," he said at a June Senate Banking Committee hearing. "And we did not think that was necessary to do at this stage."
Many Republicans in the House and Senate objected to the delay. They argue that Fannie and Freddie's freewheeling mortgage buying policies bear as much responsibility for the housing crisis as Wall Street.
Last week, Republicans on the House Oversight committee released a 26-page report blaming Fannie and Freddie for giving rise to the housing crisis.
The companies "privatized their profits but socialized their risks, creating powerful incentives for them to act recklessly and exposing taxpayers to tremendous losses," the report said. The report also blames the government for using the companies to meddle in the housing market while allowing them to accumulate political power to beat back regulatory efforts.
Over two decades, Fannie and Freddie each spent millions of dollars on lobbyists and millions on campaign donations through their political action committees and employees. Historically their campaign spending has gone primarily to the party in control of Congress.
Mostly through contributions to his presidential campaign, Obama, with a total of more than $126,000 from the two mortgage giants, is second only to Sen. Chris Dodd (D-Conn.) on the list of lawmakers who have received funds since 1989, according to the Center for Responsive Politics.
Last week's Republican report notes the companies' political activities while also calling for a restructuring of the government's role in the housing market.
"The findings in this report should remind this Congress that ignoring the role of politics and government in causing the housing crisis and the economic collapse while pursuing other regulatory reforms will not fix the underlying problem," Rep. Darrell Issa (R-Calif), the committee's ranking member, said in a statement.
Too Big to Fail
At the time the government seized Fannie and Freddie, the Bush administration believed the companies were too important to the nation's housing market to be allowed to fail. The companies own or guarantee more than half of U.S. single family mortgages, together worth more than $5 trillion. They buy the mortgages from lenders such as banks, which can then use Fannie and Freddie money to offer new loans to consumers.
Despite being privately owned and publicly traded, Fannie and Freddie have operated under a congressional charter for about 40 years. They functioned as so-called government sponsored enterprises.
While Fannie and Freddie's public function is to guarantee and buy loans to keep the credit markets flowing, they also are out to make a profit. Starting around 2003 Fannie and Freddie accumulated a portfolio of risky subprime mortgages. These purchases, made after the government's urged that the companies expand homeownership for low-income families, proved disastrous when the housing bubble burst.
It also turned out that Fannie and Freddie had been dangerously undercapitalized after years of lax federal oversight. The government allowed both of them to keep more than $100 in debt for every $1 in capital. (When Lehman Brothers and Bear Stearns collapsed last year, they were leveraged at less than 40:1.)
According to recent government data, Freddie and Fannie already have tapped more than $50 billion and $34 billion, respectively, of their federal credit lines. Treasury and the Federal Reserve also are buying their debt on the open market. In total, the companies have received direct and indirect federal support worth more than $840 billion in the last year, public reports show.
Phaup, of George Washington University, said taxpayers might end up paying more than the $400 billion in direct support already promised to Fannie and Freddie. After all, the government originally promised them $100 billion each until it became obvious in February that was not enough.
How much they take will depend on how long the housing market takes to recover, administration officials have said.
That might be a while. James Lockhart, director of the Federal Housing Finance Agency (FHFA), which took Fannie and Freddie into conservatorship last year, told Congress recently that the companies' short-term outlook is "poor."
And as the companies continue to draw from their government lifelines, they dig deeper into debt. That's because they're required to pay the government 10 percent annual interest on money they borrow. Meanwhile, the longer a cloud of uncertainty hovers over Fannie and Freddie, the harder it is for them to attract qualified managers and risk analysts to their staffs.
"Why are we punting to the future Fannie Mae and Freddie Mac --maybe we'll get around to it next year?" Sen. David Vitter (R-LA) asked Geithner at the recent Senate Banking Committee hearing. "I mean, to me, at least, it seems like we're ignoring a core problem."
Phaup suggested that Obama immediately appoint a study group to investigate the future of the companies.
Fixing the Model
After some prodding from Republican senators at last month's Senate banking hearing, Geithner estimated that he could announce further changes to Fannie and Freddie in the first half of next year. Asked for a progress report, a Treasury spokeswoman declined to talk specifics with us.
Whenever the government does move to deal with Fannie and Freddie, it will face wide disagreement on how best to change the model.
Thomas Stanton, a fellow at the Center for the Study of American Government at Johns Hopkins University, believes the current public-private model led to the downfall of Fannie and Freddie. Trying to serve two masters--Congress and shareholders--proved impossible for them, Stanton said.
"The drive to satisfy shareholders is intense and easily can overwhelm considerations of what might be best for the financial system or the mortgage market or American taxpayers," Stanton told the House Committee on Oversight and Reform last December.
Stanton also believes that Congress' close relationship with Fannie and Freddie allowed the companies to accumulate so much political power that "they simply dominated their environment," effectively killing efforts to oversee them, he said in a speech to the Federal Reserve Bank of Chicago in May.
Even when the government did attempt to crackdown on accounting irregularities at the companies, the effort was stymied when congressional hearings became the responsibility of then-Rep. Michael Oxley (R-Ohio), who was the "most frequent featured guest" at 19 fund-raisers held by Freddie, according to the recent Republican oversight committee report.
Campaign donations and lobbying efforts often stood in the way of reform.
Fannie spent $3.8 million on lobbying in 2008 alone, records show. Since 1992, Freddie has spent more than $9.8 million on campaign contributions, a majority of which went to Republicans, according to the Center for Responsive Politics. After Democrats took control of Congress in 2007, Freddie's contributions shifted slightly to that party. Fannie's contributions have leaned more Democratic over the past few election cycles.
The center's Web site, opensecrets.org, also reported last year that 28 lawmakers had between $598,100 and $1.7 million of their own money invested in the two companies.
Some of Fannie and Freddie's leaders were also political powerbrokers themselves, including Obama's current chief-of-staff, Rahm Emanuel. After Emanuel worked as a senior adviser in the Clinton administration, President Clinton appointed him to Freddie Mac's board in 2000.
Johnson's successor at Fannie, Franklin Raines, had been President Clinton's director of the Office of Management and Budget. After being engulfed in an accounting scandal at Fannie, Raines was forced into early retirement in 2004. Ultimately, federal regulators charged him with manipulating Fannie's earnings to his own financial gain.
This history, Stanton said, shows that the companies hired executives "in good part based on ability to manage political risk rather than on their ability to manage two of the largest financial institutions in the world."
Yet some of the options currently discussed for Fannie and Freddie's future would keep them straddling the public and private sectors. These options include ending the conservatorship agreement but returning them to government sponsored enterprises. Ideas that would make them public utilities, like electric companies, or put them under cooperative ownership, also have been floated.
At a recent congressional hearing, Lockhart said it's also possible to establish purely private-sector firms without an implicit government backing.
On the other end of the spectrum, the companies could be nationalized, making them a government agency or merging them with another. Lockhart said he opposes this option.
Stanton argues, however, that the government should take the company into receivership, a first step towards bankruptcy that would wipe out the remaining shareholders. Receivership, unlike conservatorship, is involuntary. This way, Stanton said, Fannie and Freddie could, "support the mortgage market without conflicting loyalties."
James Angel, associate professor at the McDonough School of Business at Georgetown University, believes the government should remake Fannie and Freddie so they focus solely on their public duty to guarantee mortgages. Their efforts to buy and sell mortgage-backed securities should be wound down, he said, because "We don't need a government-sponsored hedge fund."
Angel generally praised the change this month in the Obama administration's foreclosure relief program loosening the rules for homeowners who have kept paying their Fannie or Freddie mortgages. It allows people who owe up to 125 percent of their home's current value, up from the previous ceiling of 105 percent, to lower their monthly payments. The rule, Angel said, will give homeowners an incentive to stay in their homes rather than walk away from the mortgage.
Collecting lower interest rates may not appeal to Fannie and Freddie investors, however. The plan could essentially convert Fannie and Freddie into a "bad bank" that holds assets no one else wants, Angel said. But, he added, that could be good public policy if it stems foreclosures.
"The taxpayers have already gotten the shaft with Fannie and Freddie, so why not use [the companies] to absorb some of the other problems?" Angel said. "Fannie and Freddie have kept our recession from turning into a depression."
For their part, Fannie and Freddie officials said they were staying out of discussions about what comes next.
A Freddie spokeswoman, interviewed on condition of anonymity because she was not authorized to speak publicly about the topic, said her company is no longer trying to influence the outcome. Freddie's future is "still very up in the air," she said.
For twenty years, Fannie and Freddie influenced their own fate using high-paid lobbyists and targeted campaign donations.
Now that they are essentially owned by the government, and prevented from formally lobbying Congress, the companies have to watch from the sidelines like everyone else.