The historic takeover of Fannie Mae and Freddie Mac, which could come as soon as this weekend, moved to the forefront of the presidential campaign Saturday as candidates and congressional leaders seized on the enormous implications for taxpayers and the economy.
Democratic presidential nominee Barack Obama said Saturday that any government takeover of the troubled mortgage giants must put the interests of taxpayers and homeowners first. His opponent, Republican nominee John McCain, said it was essential to restructure the mortgage giants.
"Any action we take must be focused not on the whims of lobbyists and special interests worried about their bonuses and hourly fees, but on whether it will strengthen our economy and help struggling homeowners," Obama told reporters after a campaign stop in Indiana.
He stopped short of making detailed proposals, saying "we need to carefully address" the possible impact on community and regional banks. "But we must not allow government intervention to protect investors and speculators who relied on the government to reap massive profits," he said.
McCain said in an interview for CBS "Face The Nation" to be aired Sunday that the mortgage giants need to be restructured. His running mate, Alaska Gov. Sarah Palin, said a "McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need them." Palin, speaking in Colorado Springs, Colo, where the candidates were campaigning, did not elaborate.
"I think that we've got to keep people in their homes," McCain said. "There's got to be restructuring, there's got to be reorganization, and there's got to be some confidence that we've stopped this downward spiral. It's hard, it's tough, but it's also the classic example of why we need change in Washington. It's an example of cronyism, special interest, lobbyists, a quasi-governmental organization where the executives were making hundreds of — some billion dollars a year while things were going downhill, going to hell in a hand-basket. This is the kind of cronyism, corruption, that's made people so justifiably angry."
Fannie Mae and Freddie Mac together hold or back half of the nation's mortgage debt, and have played an increasingly important role in the real estate market since the credit crisis started in August 2007. A government bailout could cost taxpayers around $25 billion, according to the Congressional Budget Office.
Treasury Secretary Henry Paulson and two other regulators are working on a plan to put the troubled mortgage finance companies into a conservatorship and remove Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron, according to Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee.
Obama, talking of possible changes to Freddie Mac and Fannie Mae, said: "We can't have a situation in which, during boom times, management and investors are soaking up huge profits, taking extraordinary risks, and thinking to themselves that if they get into trouble because of these risky investments that somehow the taxpayers are going to be there to bail them out."
What took place at the two institutions, he said, "was in many instances irresponsible," even if it was legal. "They were boosting profits as a priority," he said, which produced management bonuses. "I think that has led to some of the problems," he said.
Obama restated his call for a second stimulus package this year, which would involve a tax rebate for individuals and aid to states for education, health care and other costs.
Obama and McCain said Paulson briefed them on the mortgage crisis and the administration's steps toward a government takeover of the two financial companies.
Trouble in mortgages
News of the likely government takeover Friday followed a report by the Mortgage Bankers Association that more than 4 million American homeowners with a mortgage, a record 9 percent, were either behind on their payments or in foreclosure at the end of June.
That confirmed what investors saw in Fannie and Freddie's recent financial results: trouble in the mortgage market has shifted to homeowners who had solid credit but took out exotic loans with little or no proof of their income and assets.
Fannie Mae and Freddie Mac lost a combined $3.1 billion between April and June. Half of their credit losses came from these types of risky loans with ballooning monthly payments.
While both companies said they had enough resources to withstand the losses, many investors believe their financial cushions could wither away as defaults and foreclosures mount.
Frank said the companies' financial picture was better than Wall Street investors assumed, but "it just plainly became clear that elements of the market wouldn't' accept that."
The epic decision highlights the size of the threats facing the housing market and the economy. On Friday, Nevada regulators shut down Silver State Bank, the 11th failure this year of a federally insured bank. And earlier this year, the government orchestrated the takeover of investment bank Bear Stearns by JP Morgan Chase.
The crisis surrounding Fannie and Freddie promises to be a major challenge for the next president.
The role the two companies play in the U.S. mortgage market has grown dramatically over the past year as other lenders collapsed under the weight of bad subprime loans. The companies guaranteed about three-quarters of all new mortgages in the second quarter of this year, up from under 40 percent in 2006, according to the trade publication Inside Mortgage Finance.
Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and James Lockhart, the companies' chief regulator, met Friday afternoon with the top executives from the mortgage companies and informed them of the government's plan to put the companies into a conservatorship as early as this weekend.
In July, Congress passed a plan to provide unlimited government loans to Fannie and Freddie and to purchase stock in the companies if needed. Critics say the open-ended nature of the rescue package could expose taxpayers to billions of dollars of potential losses.
Fannie Mae was created by the government in 1938, and was turned into a public company 30 years later. Freddie Mac was established in 1970 to provide competition for Fannie.