Throughout this year's debate over new financial regulations, Republicans repeatedly pointed to two economic bogeymen they blame for the Great Recession: Fannie Mae and Freddie Mac.
In the eyes of Republican lawmakers like Sen. Mitch McConnell, Rep. John Boehner and Sen. Lamar Alexander, Fannie and Freddie started the rush into risky home mortgages that ultimately shook the foundation of the whole economy.
Not everyone agrees with that assessment, but the government-sponsored companies have lost a lot of money on bad home loans, leaving taxpayers on the hook for hundreds of billions of dollars.
The Obama administration hosts a conference Tuesday on how to fix Fannie and Freddie, or replace them with something better.
'A Lot More Going On'
The two companies have long been the biggest players in the mortgage market, making them natural scapegoats when the market soured -- especially among Republicans already suspicious of government involvement in financial affairs. Never mind that publisher Guy Cecala of Inside Mortgage Finance says Fannie and Freddie were not the biggest offenders in backing risky, subprime loans.
"Clearly there was a lot more going on than just Fannie Mae and Freddie Mac purchasing a few bad loans," he says. "In fact, the bulk of the bad loans weren't purchased by Fannie Mae and Freddie Mac.
"Yet, Fannie and Freddie carry the government guarantee; they're supposed to do good things for the housing market. And to some extent, everybody feels they let us down."
Fannie and Freddie were established decades ago to encourage homeownership by making loans more widely available. They provide money to lenders by buying up mortgages, keeping some and bundling others for sale to investors. Although both were private, for-profit companies, it was generally understood the government would back up Fannie and Freddie if they got into trouble. That's just what happened two years ago when the government took over the companies, leaving taxpayers with a very big bill.
Private Sector Replacements
"There's probably enough finger-pointing to go everywhere," says Michael Berman, incoming chairman of the Mortgage Bankers Association, which proposes replacing Fannie and Freddie with new, private companies that would take over the job of bundling mortgages for sale to investors.
For a fee, those bundles would still be backed by the federal government, but unlike Fannie and Freddie, the bundling companies would not be. Also, there would be strict limits on the kinds of loans they could handle.
"It would be a conservative lending environment with respect to the government involvement," Berman says. "The key is to make sure you have these kinds of classic, historically proven products like a 30-year mortgage, 15-year mortgage, that would be there through all times of the economy, including the kind of stress that we have today."
One question at Tuesday's conference is how big a role the government should play in that effort.
Quick Changes Unlikely
Consumer advocate Mike Calhoun of the Center for Responsible Lending says until their recent problems, Fannie and Freddie did a lot of good, popularizing the 30-year-fixed-rate mortgage for example.
"We need to be careful, the proverbial, don't throw the baby out with the bath water," Calhoun says.
He and other consumer advocates say Fannie and Freddie were simply following Wall Street's bad, private-sector example, when they began chasing the profits in riskier loans. Calhoun says the government is already cracking down on the most dangerous kinds of mortgages, as part of its financial overhaul passed by Congress last month.
"So if you'd had those standards in place before this last mortgage and financial crisis, we wouldn't have gone down that path," he says.
Don't look for any quick changes. Fannie and Freddie still bankroll 2 out of 3 new mortgages, and, Cecala of Inside Mortgage Finance says, the fragile housing market can ill afford any hiccups in its operations.
"Can we pull the plug on them anytime soon? The answer is clearly no. We can't pull the plug on them," he says.
Tuesday's conference at the Treasury Department is an early step toward drafting legislation to deal with Fannie and Freddie next year.