McCain, Obama see different futures for Fannie, Freddie

The US government takeover of Fannie Mae and Freddie Mac means that one of the first tasks of the next president may be an overhaul of housing finance in America.

That's because the Bush administration's seizure of the twin mortgage giants is only a temporary solution to their balance-sheet woes. After the current crisis abates, the executive branch and Congress must settle on what role, if any, Washington now should play in the mortgage money market.

That issue goes to the heart of the broader philosophical differences between John McCain and Barack Obama about the importance of government to the whole economy.

Both Senator McCain and Senator Obama say they support the Fannie-Freddie takeover. But McCain says the failure of these government-sponsored entities shows they should be privatized in some manner. Obama has not gone that far, and says only that the hybrid public-private nature of Fannie Mae and Freddie Mac needs to be clarified.

"This is obviously a very important issue ... it's a great opportunity to set our system of housing finance to right," says Douglas Elmendorf, a fellow in economic studies at the Brookings Institution.

Treasury Secretary Henry Paulson announced Sept. 7 that the government was taking over the reeling Fannie and Freddie, which own or guarantee about $5 trillion worth of home loans, half the nation's total. Now controlled by a US conservatorship, they could cost taxpayers billions of dollars, though the price tag won't be known for some time.

Secretary Paulson described the move as a "timeout" to ponder a new form for Fannie and Freddie. "The new Congress and the next administration must decide what role government in general, and these entities in particular, should play in the housing market," said Paulson. "There is a consensus today that these enterprises ... cannot continue in their current form."

Senate and House committees plan hearings next week on the US takeover.

Fannie and Freddie provide cash flow for the mortgage market by buying up home loans from banks. Their semi-government status has allowed them to borrow money at low rates, as investors believed that the government wouldn't allow them to fail. At the same time, their semiprivate nature has allowed them to reap high returns for stockholders and top executives – while forcing them to try to maintain the profitability that Wall Street demands.

Experts lay out three general scenarios for Fannie's and Freddie's futures.

On the one hand, they could be broken up and sold off. Some critics of the companies have long held that they have been an unwarranted government interference in the marketplace.

On the other hand, they could be recapitalized largely as they currently exist, perhaps with some extra regulatory controls. Democrats in Congress are generally supportive of keeping them associated with the government.

Or, in the middle, they might be restructured to resemble regulated utilities – private firms with government-set rates and profits.

McCain insists that at least partial privatization for Fannie and Freddie is the answer. If elected, he would "make sure they are permanently restructured and downsized," he wrote in a Sept. 9 opinion piece.

Obama has been more cautious, and less specific, about what he might do. But he has been critical of the money investors and executives have made from the mortgage twins. "We must ensure that any plan clarifies the true public and private status of our housing policies," Obama said over the weekend .

• Associated Press material was used in this report.