The two mortgage heavyweights have been the backbone of U.S. housing finance scene for decades and have provided the intended liquidity to the market. This in turn allowed more people to buy a home to live in, the ultimate goal of the system. Then in the early 2000's the real estate market grew hot, piping-hot in select states like California, Florida, Nevada and Arizona, and as history suggests all out-of-control booms come to a crashing halt sooner or later. Like now. To fuel the boom, mortgage lenders, large and small, jumped head first on the housing bandwagon to make enormous amounts of money with fancy loan products. The activity during these years was fast and furious wherever one looked.
As things were unfolding. Fannie and Freddie were watching all of this from the sideline and eventually the desire to increase their profits overruled prudence and they joined in on the feast. To make a long story short, now they are grappling with heavy losses, just like most banks are, from these boom-time loans and are nearly insolvent.
Washington and think tanks and others in the know are presently debating what to do with these bleeding mortgage players. Obviously they need to be restructured in some way to keep this from happening again. A few experts call for their nationalization, some suggest they should be sold in pieces and some would reduce their role in the vast mortgage finance system.
Whatever is decided, it should happen after the markets have returned to some kind of normalcy. If something is done now, as some experts suggest, it would just add to the credit scene volatility, causing more harm and prolong the long-anticipated recovery.
Moreover, the GSE, or Government Sponsored Enterprise, setup did work for a long time. The current turmoil is then clearly the responsibility of Fannie's and Freddie's boom-time leadership who were more influenced by profit prospects than following the mandates each institution had. And where were the federal regulators tasked with overseeing them? There were a few warning voices heard in Washington early in the decade but they were quickly shouted down and the show, unfortunately, went on.