Shouldn’t Uncle Sam bail out homeowners, too?

How will the takeover of Fannie and Freddie directly affect me? Through my personal income tax, increase in property tax? Exactly how?
— Marti, Hillsdale, Mich.

You won’t be getting a bill from the Treasury for the cost of the takeover. And the guarantee of Fannie and Freddie’s loans won’t have an impact on your property taxes — except perhaps by speeding the recovery of the housing market, at which point the value of your house may start rising again.

It’s not at all clear just how much the mess will cost once it’s cleaned up: There are just too many unknowns at the moment.

The biggest unknown: How much further will house prices fall before they begin to stabilize? The mortgages that Fannie and Freddie are holding — and the Treasury is now guaranteeing — are backed by real estate. If the value of that real estate goes down, so does the value of those assets. It’s also not clear how many homeowners who are still keeping up with their payments will eventually fall behind and default. The higher the default rate rises, the bigger the losses.

If all goes well and the economy and housing markets recover fairly quickly, it’s possible the government could end up making money on the deal — because it took a stake in the two companies in return for covering its debts. It’s also possible the Treasury will be on the hook for tens — perhaps hundreds — of billions of dollars in losses. No one knows.

The takeover has already had one important — and positive — development for all of us. Long-term interest rates, including mortgage rates, dropped sharply in the days after the bailout was announced and are expected to remain low. That could help speed the housing market’s recovery. But it’s too soon to know how much impact those lower rates will have.

Who authorized this takeover of Fannie/Freddie?
— Curtis, Address withheld

Congress did.

One of the major issues in the yearlong debate about the housing relief bill passed this summer was the fate of these two government-sponsored entities. Over the years, they developed a number of friends on Capitol Hill, thanks to a formidable lobbying effort. That’s one reason Congress allowed Fannie and Freddie to carry a relatively thin capital cushion. Critics had been warning for years that their capital base was too thin to carry them through a nasty downturn.

Fannie and Freddie didn’t do themselves any favors when it turned out they weren’t exactly sure how much money they’d made or lost. In June 2003, Freddie Mac said it had misstated earnings by $5 billion between 2000 and 2002 — inflating results for some periods and cutting them in others. In December 2004, Fannie Mae said it also had trouble keeping its books, bringing the resignation of top managers and demands from regulators that it build up more capital. Two years later, Fannie Mae restated earnings for 2002, 2003 and the first half of 2004 by $6.3 billion.

Since then, things have gone from bad to worse. As the housing market collapsed, Fannie and Freddie began posting huge losses — close to $20 billion so far — and warned that more losses were coming. So when it came time to enact a housing relief bill this summer, the White House insisted that the bill include a provision to create a tougher regulator for Fannie and Freddie with the authority to let the government step in and take them over if needed.

The question now is: What is the government going to do with these two entities? Many of Fannie and Freddie’s critics say the real problem is that they got too big — creating outsized risks if something went wrong. Some of those now overseeing Fannie and Freddie would like them to get smaller. Once the housing market recovers and the financial system stabilizes, there may be plenty of private lenders out there to take up the slack. But we’re not there yet. Until then, it will probably be business as usual — or as close to usual as possible — for Fannie and Freddie.

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