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Double Trouble

September 18, 2008

The two quasi-government mortgage lending giants, "Fannie Mae" and "Freddie Mac," have just become all government. Last week, it was announced that the Treasury Department has seized the two companies.

The Federal National Mortgage Association and the Federal Home Loan Mortgage Association, known popularly as Fannie Mae and Freddie Mac, respectively, don't provide home mortgages directly. Instead, the two giants operate under a federal charter to buy packages of already existing mortgages from lenders. That pumps more money back into the direct lending market, allowing banks to provide more mortgages.

But it also has stuck Freddie and Fannie with billions of dollars' worth of "bad paper" - that is, mortgages the borrowers can't pay off.

Last week, both Fannie and Freddie managed to convince investors to buy more debt from them. But federal officials apparently decided that Fannie and Freddie would not be able to cover their own obligations for much longer, so Uncle Sam stepped in.

In effect, the Treasury Department's action means that taxpayers will pay enormous sums - as much as $200 billion according to some estimates - to rescue lenders from their own faulty decisions in granting loans to bad credit risks.

But the outlook is not that Freddie and Fannie, along with lenders depending on them, will be improved. To the contrary, Treasury Department officials have said that under the takeover, they will continue to insist that lenders provide more mortgages to low- and middle-income borrowers. And, because Uncle Sam will be providing the money to do that, incentives to take risks in providing loans may remain high.

We oppose use of taxpayers' money to bail private industry out of any problem of its own making. But in this case, federal regulators bear a share of the blame in encouraging bad loans.

Instead of using the bailout to correct that, federal officials seem to want to encourage it. That makes the bailout doubly troubling.



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