Panic over these federally backed mortgage giants shows why they must eventually be shrunk.
Americans are little aware of how much they rely on federal assistance to help pay for a home. No longer. The mortgage crisis has finally caught up with two government-backed giants in home finance. Once the crisis passes, it may be time to further privatize the American Dream.
Investor panic has fallen over both of the federally chartered private enterprises known as Fannie Mae and Freddie Mac. Their stocks have tumbled as some experts question whether further drastic drops in house prices may sink the two into enough red ink to force a government bailout.
The implicit guarantee of federal backing for Fannie and Freddie, combined with the millions they have spent to lobby Congress for favors, have given them an outsized advantage in the mortgage business, reselling the loans to global investors. They are allowed to borrow easily and keep very little money on hand compared with their competitors. As a result, they own or guarantee about half of the country's $12 trillion in mortgage debt.
They are socialist instruments holding great sway over private finance from Wall Street to Main Street, having built up powerful allies among home builders and real estate agents to keep it that way.
So far in the past year, the two have lost more than $100 billion in value. A full bailout could cost taxpayers as much as the Iraq war, or more. To stem further losses, the US Treasury is aggressively working to find ways short of a bailout to rescue them, such as injecting fresh capital to help them ride out the mortgage storm.