The two firms (Fannie Mae / Freddie Mac), which were set up by the government, own or back about $5 trillion worth of home debt - half the mortgage debt in the country. Since last summer, they have suffered about $12 billion in losses.
Fannie and Freddie have become virtually the only source of funding for banks and other home lenders looking to make home loans. Their ability to do so is crucial to the recovery of the battered home market and the broader U.S. economy.
The two firms buy loans, attach a guarantee, then sell securities backed by the loans' income stream. They have been badly hurt in the last year by the sharp decline in home prices and the rise in mortgage delinquencies and foreclosures.
Shares of the two troubled mortgage giants have plummeted more than 80% this year on fears about their financial health in the wake of the housing crisis. Saving Fannie Mae and Freddie Mac could [will] cost the U.S. taxpayer. But so could letting the two mortgage giants collapse. A rescue plan that uses federal dollars would risk increasing the deficit and possibly lowering the U.S. debt rating, making it more expensive for the government to borrow in the future. A decision not to intervene could lead to deep pain in the mortgage market and the parts of the economy tied to it. Presidential Cannidates also have their own views on the housing market. Some advocate letting the free markets play themselves out with little government intervention. Ron Paul is the biggest supporter of this.
Paul does not support the increase in relaxation of guidelines in such programs such as the FHA programs and Fannie Mae guidelines. As you may be aware, President Bush has been pushing for increases in FHA and Fannie Mae loan limits as well as proposing a freeze on current ARM rates for buyers who have been making their payments on time at the introductory rate, but may have difficulties once their rates reset.
Barrack Obama sees a much different root problem and solution to it. His answer is for more accountability in the real estate industry itself. Obama plans to go after the lenders, banks, loan officers and realtors who may have misled buyers as far as the programs that they were getting themselves into. He proposes increased penalties and tightening of guidelines for predatory lending, and
does not necessarily believe that direct government intervention other than tax breaks for middle-class homeowners is necessary. While this is a great idea in and of itself, I do not believe that Obama has gotten to the root of the problem in his solution
. Those who believe in free-market economics obviously are in support of letting the markets work themselves out. I would consider myself to lean more in this direction, although I do believe that some government protection of the industry must happen as there is plenty of room for fraud and manipulation of fees and buyers as the current guidelines now stand.
We are seeing some of this happen already, specifically in Nevada and other states as loan officers are becoming directly responsible for making sure that stated income or non-verified income loans are reasonable and justified. This shifts the responsibility more on to the lending institutions and less on the borrowers.
High on McCain's to-do list is something almost no Democrat or Republican leader has advocated:
Raising, not lowering, minimum mortgage downpayments for the rapidly-growing FHA program. Pending bipartisan legislation on Capitol Hill would CUT FHA's downpayments from the current three percent minimum to as low as zero -- favored by the House -- or to 1.5 percent -- favored by the Senate.
"So many homeowners," he told a California audience, "have found themselves owing more than their home is worth because they never had much equity in the house to begin with." He said he opposes bailouts of lenders who made bad loans, which would in effect be rewarding them for their own poor underwriting decisions. But short of that sort of collapse, he thinks lenders today ought to modify borrowers' loans, reduce principal debt and interest rates -- taking the hits to the bottom line themselves -- rather than looking to the federal government. He said when there are no good measures of the true value of mortgage bonds -- when no investors want to buy them and no index tracks them -- current accounting rules may make lenders' balance sheets look far worse than they really are. 
