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Fannie, Freddie and you

When real estate values were rising, would-be buyers had to hope they weren’t investing at the market’s peak and paying more for a house than it would be worth in a year. Now, with values plunging, the question is how much further prices will fall before they start to recover. The risk of jumping too early into a crashing market is the same as arriving too late to a hot one.

You don’t have to be shopping for a new house to face this risk. You just have to be a taxpayer. Last week, federal regulators allowed two government-sponsored housing finance firms, Fannie Mae and Freddie Mac, to increase their bets on the slumping U.S. real estate market. The Office of Federal Housing Enterprise Oversight lowered the amount that the two firms must hold in reserve in case of losses, enabling them to buy an additional $200 billion worth of mortgages with the money they already have. The firms pledged to raise more cash, which they would use to buy or guarantee even more mortgages. They also promised to support tougher regulation and other reforms sought by the oversight office. A bill:H.R.1427: to put those reforms in place, HR 1427, is stalled in the Senate.

The firms’ expansion would pump more money into lenders’ hands, making it easier for consumers to obtain mortgages or refinance homes. Fannie Mae and Freddie Mac were created to provide just that sort of boost to homeownership. (The firms are publicly traded companies but have a line of credit from the Treasury.) Serious accounting and managerial problems at the firms, however, led the oversight office to clamp down four years ago. Its fear was that if the firms stumbled, taxpayers would be forced to bail them out. The mortgages they own or guarantee are worth about $5.1 trillion, or almost twice as much as the entire federal government spent in fiscal 2007. And unless the market stops sliding -- year-over-year values dropped 11% in January -- an increasing number of those homes will be worth less than the amount owed on their mortgages.

Defenders of Fannie Mae and Freddie Mac say that they’ve minimized their risks by avoiding sub-prime loans and other housing market minefields. All the same, Fannie Mae lost $2.1 billion last year, and Freddie Mac $3.1 billion. Fannie Mae also has been saddled with a growing number of repossessed homes -- more than 33,000 at the end of last year, compared with about 25,000 the year before. As the firms expand, the least Congress can do is approve the tougher controls sought by their regulators.

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