Fannie, Freddie Mortgages Rescue Strategies

With Fannie Mae and Freddie Mac now under government control, mortgage refinance and government assistance programs to promote foreclosure prevention will be their main focus.

The government has been a longtime partner to Fannie Mae and Freddie Mac, but after the emergency takeover, it must now assume full responsibility for them. Billions of dollars of taxpayer-funded government assistance for foreclosure prevention appears to be the cornerstone of the rescue plan.

Senators plea for foreclosure prevention

It's too soon to tell how the future of Fannie Mae and Freddie Mac will unfold. But already, four prominent senators-Charles Schumer (D-NY), Bob Casey (D-PA), Robert Menendez (D-NJ), and Sherrod Brown (D-OH)-are pushing for a freeze on home repossessions. "In many instances, these homeowners could remain in their homes and their loans could once again become performing assets through a loan modification," the senators wrote in a letter to the Federal Housing Finance Agency.

Visionary government assistance

The plan presented by the senators is not new. It's specifically modeled after strategies first conceived by Sheila Bair, the head of the FDIC. A year ago, when many mortgage companies, public officials, and members of the real estate community assured us that the housing crisis would end in 2008, Bair delivered a controversial speech to an investment conference. She called on lenders to permanently freeze the interest rates on subprime adjustable-rate mortgages to help homeowners manage their mortgage payments without having to do a mortgage refinance.  "Make it permanent, and get on with it," she said, warning her audience that if they didn't implement her radical ideas, they'd be in for an even worse financial catastrophe.

Many considered Bair an innovative, visionary leader, but her critics-many of whom are mortgage industry power brokers-said that her ideas represented too much government interference. Now, in hindsight, many of those reluctant and skeptical lenders wish that they had taken her advice.  IndyMac Bank, for example, is now bankrupt and has been taken over by Bair's own organization, the FDIC. As soon as the takeover happened, a temporary freeze on foreclosures was instituted by Bair as a way to give homeowners a break while the FDIC works to modify their unmanageable loans.

Who's gonna pay?

Since it now runs Fannie Mae and Freddie Mac, the Treasury has the clout to take its own dramatic steps at foreclosure prevention through government assistance. Many housing experts say it should, and they point out that if Fannie Mae and Freddie Mac had been more aggressive about providing affordable loans before this crisis happened, America might be in much healthier economic shape.

The Senate already authorized a $300 billion foreclosure prevention initiative, but many homeowners won't receive that particular brand of government assistance because it's limited only to those who meet rather complex qualifications.  Ultimately, it's taxpayers-including those hoping for foreclosure prevention aid--
who pick up the tab for government assistance.