Two mortgage companies 'too big to fail'

Jul 13, 2008 (Omaha World-Herald - McClatchy-Tribune Information Services via COMTEX) -- FRE | Quote | Chart | News | PowerRating -- Difficulties in the housing and credit markets rocked the nation's two largest mortgage finance companies last week as shares in Fannie Mae and Freddie Mac plummeted more than 40 percent early Friday before recovering.

Investors were concerned about the financial state of the government-chartered, publicly traded companies and speculated that the federal government might have to bail them out.

Anxiety eased when Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, suggested the companies could receive emergency Federal Reserve loans if necessary, as large investment banks have.

The financial health of Fannie Mae and Freddie Mac is critical because they play a crucial role in the housing market, holding or guaranteeing about half the nation's $9.5 trillion in home loans.

"It would be catastrophic to have any of the two fail, because they hold huge amounts of mortgage debt," said Mike Jacobson, chairman-elect of the Nebraska Bankers Association and president and chief executive of NebraskaLand National Bank in North Platte.

The federal government would step in if necessary, he said.

"They have a good and strong mission," Jacobson said of Fannie Mae and Freddie Mac.

Market perceptions might have played a bigger role in Friday's panic than a changed financial picture of the two companies, said Karen Shaw Petrou, managing partner of consulting firm Federal Financial Analytics in Washington.

"External reality doesn't warrant such an action, but external reality seems no longer to matter," she said.

Congress created Fannie Mae in 1938 and Freddie Mac in 1970 to keep money flowing into the home-loan market by buying up mortgages and bundling them into securities for sale to investors worldwide. The companies help make homeownership more affordable for low- and middle-income Americans.

Mike Riedman, president of residential sales at NP Dodge in Omaha, said the national housing crisis has made lenders stingier with mortgages and lines of credit based on home equity. Problems at Fannie Mae and Freddie Mac could make funding sources even tighter, Riedman said.

Ernie Goss, an economics professor at Creighton University, said the federal government can't let Fannie Mae or Freddie Mac fail, but federal backing has made lenders too willing to take on risky debt. The government's involvement has helped make Freddie and Fannie too big to fail, Goss said.

"The government needs to get out of the business" of creating incentives for risk-taking, Goss said.

Kelly Edmiston, a senior economist at the Federal Reserve Bank in Kansas City and the acting director of the bank's Denver branch, said the two companies have helped banks nationwide make mortgage loans. Even in strong housing markets they have an important role, Edmiston said.

"I think it's very important that there be a market to securitize mortgages, so funds can flow to banks to originate those mortgages," Edmiston said.

This report includes material from the Associated Press.

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