NOAH ADAMS, host:
One year ago today there was a quake across our economic landscape. September 7th, 2008, the Bush administration announced it was taking over the mortgage giants Fannie Mae and Freddie Mac. And so began a week of tremors, large and small, waves of them, one on top of the other, which at the time sounded something like this.
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Unidentified Woman #1: Today, Lehman Brothers had more bad news: a quarterly loss of nearly $4 billion. The government is taking over Fannie and Freddie.
JIM ZARROLI: For months, U.S. officials had tried to downplay the danger that Fannie Mae and Freddie Mac posed to the financial…
Unidentified Man #2: …housing prices, earnings and cash continues to…
Unidentified Man #3: …to tax…
Unidentified Man #2: …their ability to fulfill their mission has deteriorated.
Unidentified Woman #1: Another Wall Street firm facing…
ZARROLI: Yesterday afternoon with the stock market down around 300 points and falling, Treasury…
Unidentified Man #4: We're not going to move through this in a straight line.
ZARROLI: Investors were worried that the government wasn't doing more to help.
Unidentified Man #5: We're looking at not one, but a series of investment banks and now a major insurance company in deep trouble.
Unidentified Man #6: We're talking hundreds of billions.
Unidentified Woman #1: Treasury Secretary Henry Paulson says the country needs the biggest financial rescue in American history and needs it fast…
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President GEORGE W. BUSH: We put forth a plan that was big because we got a big problem.
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ZARROLI: And then in the space of, really, just a few minutes, you could see the DOW fall 500, 600, 700. It was really scary.
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ADAMS: That last report on stocks falling was from our reporter, Jim Zarroli, who covers Wall Street for us. And we're going to hear more from him in a minute. It was the start of that week, the taking over of Fannie Mae and Freddie Mac that sent events spiraling out of control. The two companies were pillars of the U.S. real estate industry, owning more than half of all outstanding mortgages. But they were badly hurt, of course, in the collapse of the housing market. Now, a year later, the companies live on under government ownership. And Jim Zarroli reports that the future of Fannie Mae and Freddie Mac still is not clear.
ZARROLI: September 2008 will always be known as a month of sweeping and dramatic changes in the financial markets and it began with the decision to take over Fannie Mae and Freddie Mac. Bush administration officials had spent days underscoring the urgency of the companies' plight. Here is Treasury Secretary Henry Paulson during a TV appearance.
Mr. HENRY PAULSON (Former Treasury Secretary): A failure by either one of these companies would cause a great havoc in the economic system. It would be a big blow to the average American, affect their budget and their ability to get a consumer loan, a car loan.
ZARROLI: Paulson's job was made harder by the fact that many members of the public had just a vague idea what Fannie and Freddie did. Founded during the Depression, Fannie Mae had become a major source of funding for the housing market. It took money from investors and used it to buy mortgages. And investors around the world loved giving it money. That's because Fannie and its younger sibling, Freddie Mac, were government-sponsored entities and had a kind of implicit guarantee of federal support. They were seen as safe. But analyst Josh Rosner of Graham Fisher says that when the subprime crisis came along, investors started to wonder what an implicit guarantee was worth.
Mr. JOSH ROSNER (Analyst, Graham Fisher & Company): All of a sudden, investors started realizing that these companies perhaps were not as healthy as they had long said they were. And therefore, that was really what raised the question of: Is there or isn't there a government guarantee?
ZARROLI: For the Bush administration, the fear was that investors would abandon Fannie and Freddie, especially those in places like China and Korea, who had become major purchasers of their securities. That would cut off a huge source of funding for the housing market at the worst possible time. The administration tried to send reassuring signals to investors, but in the end, they were forced to takeover Fannie and Freddie altogether, placing them in what's called a conservatorship. Charles Calomiris is a professor of financial institutions at Columbia University.
Professor CHARLES CALOMIRIS (Financial Institutions, Columbia University): That means, effectively, the government has assumed the obligation for continuing to fund their losses. And the government has also allowed them to continue to operate, that is, to continue to make investments in mortgages.
ZARROLI: The new arrangement left no doubt that the U.S. government stood solidly behind Fannie and Freddie, ready to absorb their losses. And in the years since then, that's what it's done. The government has had to cover nearly a $100 billion in losses. Meanwhile, the Federal Reserve has purchased massive amounts of Fannie and Freddie securities to keep money flowing into the mortgage market. The bailout has generated plenty of criticism. Bruce Marks is CEO of Neighborhood Assistance Corporation of America, an influential housing advocacy group. He says the rescue did nothing to help those who need it most right now.
Mr. BRUCE MARKS (CEO, Neighborhood Assistance Corporation of America): The sad part is they were bailing out Fannie and Freddie with no real benefit for the borrowers out there. Yes, it benefited Wall Street. Yes, it benefited China. But it did virtually nothing for the homeowners who were at risk of foreclosure in this country.
ZARROLI: Marks wants Fannie and Freddie to help more homeowners restructure their loans when necessary. Not only haven't they done that, he says, but they set lending standards in a way that ultimately allowed them to profit from predatory loans. And he says Congress needs to take a long hard look at reforming the companies.
Josh Rosner says this kind of sentiment is being heard more and more. And he says that's a big part of the problem faced by the companies. As commercial ventures, they're supposed to make a profit for their investors, but as government sponsored entities, they also answer to Congress.
Mr. ROSNER: We've seen ongoing pressure forcing Fannie and Freddie to do things that are less and less prudent and less and less economically sensible in the name of public policy.
ZARROLI: Conservative critics say one big reason Fannie and Freddie issued riskier and riskier mortgages in recent years was because of demands from Congress that they guarantee loans to low-income borrowers. Others say pressure from investors to seek higher returns was an even bigger factor. Just about everyone agrees that the Fannie and Freddie model is broken.
The Mortgage Bankers Association last week proposed replacing them with smaller private companies whose loans are guaranteed by the government. Columbia's Charles Calomiris believes Fannie and Freddie can be replaced by private companies, but not until the real estate market improves.
Prof. CALOMIRIS: It's looking horrible. This is not a time when we can withdraw from Fannie and Freddie's involvement in the mortgage market because they're the only game in town until the private markets recover. We have to continue to use them.
ZARROLI: Meanwhile, however, the Obama administration says it's beginning to look at how to reform Fannie and Freddie. But with so many other things on its plate, that's not expected to happen until next year at the earliest.
Jim Zarroli, NPR News, New York.
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