WITH ITS decision this week to rescue the mortgage finance companies
Chartered by Congress, the two mortgage giants behave largely as private firms, buying up mortgages and reselling some in the form of securities. But each has access to a $2 billion line of credit from the federal government. Treasury Secretary Henry Paulson proposed Sunday to expand the companies' line of credit, perhaps by more than 60-fold. He raised the possibility that taxpayers would inject money into Fannie Mae and Freddie Mac in exchange for equity in the two companies. Meanwhile, the Federal Reserve announced it would allow them to borrow money at a special rate.
These steps are vital to keeping the mortgage market moving. But none of this would be necessary had the administration and Congress stepped in earlier.
More government oversight of home mortgages during the first half of this decade would have meant more attention to whether borrowers could repay their loans. Instead, a proliferation of exotic loans to borrowers with iffy credit fueled a speculative frenzy. It has since given way to plunging home prices, an epidemic of foreclosures, a shakeout in the mortgage industry, and the destabilization even of Fannie Mae and Freddie Mac, which traded in loans to relatively safe borrowers.
Critics fret that the two companies' status as creations of the federal government suggests to investors that the US Treasury stands behind their obligations. But the Treasury and the Fed stepped in not because of any implicit guarantee, but because the companies have become so central to the mortgage system that their failure would hamstring the housing market. Gigantism among financial institutions is yet another problem that regulators have failed to address.
Fannie Mae and Freddie Mac aren't the first companies that the Fed and the Treasury have deemed too big to fail. Earlier this year, as the investment house Bear Stearns was about to collapse under the weight of its subprime loans, the Fed lent out public money to grease a merger with JPMorgan Chase, with Paulson's approval.
In short, an administration philosophically opposed to regulation of the financial markets now sees that only the federal government can keep market excesses from leading to economic disaster. If only that lightbulb had switched on long before now.
