U.S. Rethinks Roles of Fannie, Freddie

America's $11 trillion home-mortgage market is heading for a makeover.

Mortgage lending in the U.S. relies heavily on institutions set up in the 1930s by politicians and government officials seeking remedies for the Great Depression. Now, bankers say, the current economic crisis will force Congress and the Obama administration to decide how to repair or rebuild those institutions, including Fannie Mae, the Federal Home Loan Banks and the Federal Housing Administration.

The main focus is on the government-backed buyers of home loans: Fannie Mae, created in 1938, and its younger cousin, Freddie Mac, formed in 1970. Heavy losses stemming from mortgage defaults prompted regulators to seize control of the two companies Sept. 6. Though hobbled by those losses, Fannie and Freddie still buy or guarantee more than half of all home loans in the U.S.

The Treasury Department has agreed to provide them capital as needed, and the Federal Reserve said last week that it would spend as much as $600 billion buying debt and mortgage-backed securities issued by Fannie and Freddie over several quarters.

The consensus among both Republicans and Democrats is that the current structure of Fannie and Freddie doesn't work. Though they are owned mainly by private shareholders, they have a public mission to support the housing market. That has led to conflicts between shareholders' desire for maximum profits and congressional demands for more support to the housing industry.

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