This is MORNING EDITION from NPR News. I'm Linda Wertheimer.


And I'm Renee Montagne.

Stockton, California is now the latest example of how deeply the housing crisis has cut into many communities. The city of nearly 300,000 people is expected to file for bankruptcy today, becoming the largest city yet to file for Chapter 9 protection.

WERTHEIMER: It's the inevitable next step after mediation with creditors failed. New real estate developments financed before the financial crisis were seen as a chance to turn around the working-class city. Instead, Stockton now has the second highest rate of foreclosures in the nation and one of the highest rates of violent crime in California.

MONTAGNE: The collapse of the housing market has led to plenty of finger pointing in Washington. Two easy targets are Fannie Mae and Freddie Mac. These government-backed mortgage giants had to be rescued by taxpayers and now owe the government $188 billion.

WERTHEIMER: At the same time, Fannie and Freddie are also crucial to supporting the housing market right now. It's important work, but with morale very low, many key people are leaving.

NPR's Chris Arnold reports.

CHRIS ARNOLD, BYLINE: It's probably a sign that things aren't so good with the company that you work for when you can't even go get a drink without somebody giving you an earful about your employer.

ANDREW WILSON: You know, if you've had a long day at work and you go to happy hour and you have to then explain what you do, and defend your employer for another hour, that can be pretty draining.

ARNOLD: That's Andrew Wilson. He does media relations for Fannie Mae. And this actually happened to him recently.

WILSON: It was a friend of my girlfriend who immediately starts peppering me with questions, and says something along the lines of, oh, well, you all just want to foreclose on people. And that's just not true, first of all.

ARNOLD: Democrats say Fannie and Freddie aren't doing enough to prevent foreclosures or to let people refinance. Republicans blame them for the entire housing market collapsing. NPR has recently reported on questionable investments at Freddie Mac. And there's been plenty of critical coverage about the bailout. And after years of this, many employees feel unfairly cast as bad guys.

WILSON: I think everybody here at Fannie Mae has had the experience where you meet somebody new, and they ask where you work. You tell them Fannie Mae and the eyebrows are up or some pretty tough comments are made. And that wears on you, there's not doubt about that.

ARNOLD: Some employees at Freddie Mac say that they've actually stopped telling people they work there. They instead say they work at the Federal Home Loan Mortgage Corporation. That's the company's original and seldom-used formal name, and that seems to confuse people and avoid unwanted confrontations.

But despite some serious missteps, it is also true that Fannie and Freddie right now are also doing a lot to help the housing market and to stabilize the U.S. economy.

KIMBERLY JOHNSON: This is our bustling trading floor. This is where all the action happens.

ARNOLD: Kimberly Johnson is a Fannie Mae vice president. She's walking me around the company's trading floor. There are rows of traders behind banks of computer monitors, and they're buying and selling and basically creating billions of dollars worth of home mortgages.

Now, when you go into a bank or somewhere else and get a home loan, you never see the people here, people like Gray McNair. She's sitting at a computer directing Fannie Mae's Capital Markets Desk.

You're kind of the invisible force on the other end that allows the money to flow kind of thing?

GRAY MCNAIR: That's right. We buy loans that the banks have capital to create more loans.

ARNOLD: They have money to create more loans.

MCNAIR: Money to create more loans, yeah.

ARNOLD: In this way, Fannie Mae is like a big money pump-house, keeping money for mortgages flowing and available.

Kimberly Johnson.

JOHNSON: Absolutely, we're making sure that the cash flows through efficiently to all different aspects of the mortgage market.

ARNOLD: Fannie Mae and Freddie Mac also guarantee mortgages. And now this is especially important since the financial crisis. Along with the Federal Housing Administration, they guarantee more than 90 percent of all new mortgages. So without them the housing market could collapse again.

Eric Belsky heads up Harvard University's Joint Center for Housing Studies.

DR. ERICK BELSKY: If you woke up one morning and no one could be able to get a mortgage to buy a home, therefore no one would really be able to sell their homes, and no one could refinance their homes, it would have been really, really disastrous. And I think that's why the federal government went in to take Fannie Mae and Freddie Mac into what's called conservatorship.

ARNOLD: In other words, the government bailed out Fannie and Freddie and put a regulator in charge who's called a conservator. That was a big reversal of fortune. Fannie Mae was created by the government during the Depression to help average Americans get home loans on good terms. And it grew into a Washington powerhouse. It was a profitable company, protected by the government, with huge lobbying power. Now it's essentially a ward of the state.

MICHAEL WILLIAMS: Congressman, I've been an employee at Fannie Mae for 20 years, serving in a vast array of roles.

ARNOLD: At a congressional hearing last fall, Fannie Mae's CEO, Michael Williams, got grilled about his compensation. Republican Darrell Issa says Fannie and Freddie now function almost like government agencies, but the head of Fannie Mae is getting paid 10 times what the president of the United States himself gets paid.

REPRESENTATIVE DARRELL ISSA: You made $9.3 million in the last two years while the president made $800,000. You think that's okay.

WILLIAMS: Congressman, I have brought in and asked to take on this role as CEO so that I can put in place a management team that can help achieve the goals of conservatorship.

ARNOLD: Fannie and Freddie argue that to keep the housing market afloat, they need to attract top people and basically pay Wall Street salaries. They are, after all, managing trillions of dollars worth of loan guarantees, and they also stress they've paid back $41 billion to the government. But many lawmakers are still sharpening their axes.

EDWARD HALDEMAN: Congressmen, elected officials, talk about abolishing Freddie Mac. They talk about winding down Freddie Mac, and those are two phrases that are used by people who historically have been supporters.

ARNOLD: That's Ed Haldeman, Freddie Mac's CEO, or at least he was. Haldeman just recently stepped down. We spoke with him during his last week as CEO, and it turns out that lately a lot of top people have been leaving Fannie and Freddie. Haldeman said a big concern is this ongoing issue over compensation.

HALDEMAN: One of the committees in the House voted 52-4 to go to a government pay scale.

ARNOLD: Haldeman says that proposal sent a chill through his entire company.

HALDEMAN: It absolutely had an impact. Some people elected to take jobs elsewhere just so they would not have to go through that kind of anxiety and uncertainty.

ARNOLD: As far as why he's decided to leave, Haldeman says that he didn't expect Fannie and Freddie to be run by the government for so long.

HALDEMAN: Conservatorship was described by Secretary Paulson at the time as a time out - that is, something very temporary. And we are now going to have our four-year anniversary. Four years with no plan at all, and as a result of that, and because of so many negatives, day by day the company becomes weaker.

ARNOLD: Haldeman says that's because so many key people are leaving. In a recent SEC filing, Freddie Mac warns about the weaknesses brought about by all the departures.

HALDEMAN: More and more people decide that they need to work someplace else.

WILSON: It's challenging. There's just no two ways about it.

ARNOLD: That's Andrew Wilson again at Fannie Mae. He says, though, everybody tries to stay focused on doing good work, and so far he says Fannie is still able to attract good people.

JOHNSON: I also like the idea that we are at the center of the storm.

ARNOLD: Kimberly Johnson says that by being at the center of the storm, a lot of employees feel a sense of purpose in trying to fix the battered mortgage market.

JOHNSON: And to really think about through the next level of housing finance and what we want it to be like in the future.

ARNOLD: Still, with a lot of talent leaving, the worry is that Fannie and Freddie could make more mistakes, lose more money, and bungle their mission to responsibly foster home ownership by supporting the mortgage market. Chris Arnold, NPR News.

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