U.S. Weighs Takeover of Fannie Mae and Freddie Mac; Families Traumatized

If there was any doubt that the U.S. economy and housing market in particular are in dire straits, the numerous news reports of a possible government takeover of Fannie Mae and Freddie Mac like this one ought to strike terror in the hearts and minds of pretty much everyone. These two federally chartered entities more or less ARE the secondary mortgage market. Were they to fail, the residential mortgage market would largely collapse. If any proof was needed that the GOP/Chimperator mantra of "let the markets regulate themselves" was lunacy, this should be "Exhibit A." Not only are foreclosures causing incredible stress on families as discussed further below, the ripple effect of the housing crash keeps on spreading. No matter who I talk with in businesses relating to residential real estate - other than firms doing foreclosure work - everyone is hurting and seeing their revenues drastically reduced. People need to wake up to the fact that a lack of any rational regulation per the GOP mantra has set the stage for this potential economic disaster. Here are highlights on the Fannie Mae and Freddie Mac mess:

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WASHINGTON — Alarmed by the growing financial stress at the nation’s two largest mortgage finance companies, senior Bush administration officials are considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, people briefed about the plan said on Thursday.

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The companies, Fannie Mae and Freddie Mac, have been hit hard by the mortgage foreclosure crisis. Their shares are plummeting and their borrowing costs are rising as investors worry that the companies will suffer losses far larger than the $11 billion they have already lost in recent months. Now, as housing prices decline further and foreclosures grow, the markets are worried that Fannie and Freddie themselves may default on their debt.

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Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers.

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A conservatorship or other rescue operation would be the second time in four months that the Bush administration has stepped in to engineer a rescue to prevent the financial system from collapsing. Last March, it forced the sale of Bear Stearns to JPMorgan Chase to avert a bankruptcy of that venerable investment house. Officials have also been concerned that the difficulties of the two companies, if not fixed, could damage economies worldwide. The securities of Fannie and Freddie are held by numerous overseas financial institutions, central banks and investors.

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The companies are by far the biggest providers of financing for domestic home loans. If they are unable to borrow, they will not be able to buy mortgages from commercial lenders. In turn, that would make it more expensive and difficult, if not impossible, for home buyers to obtain credit, freezing the United States housing market. Even healthy banks are reluctant to tie up scarce capital by offering mortgages to low-risk home buyers without Fannie and Freddie taking the loans off their books.

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As this USA Today story shows, it is not just adults who are being traumatized by the current economic melt down. It is a frightening situation and will scare some children just as during the Great Depression. Here are highlights:

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Shelby and millions of other young people have become the largely overlooked victims of a real estate crisis that's led to record foreclosures, sinking home prices and rising numbers of families straining to pay mortgage bills as adjustable-rate loans grow more costly and home equity shrinks. Children and teenagers are enduring a variety of consequences — forced to move and say goodbye to friends, leaving behind schools and teachers, and losing the ability to take family vacations or take part in summer camps because of the financial strain.

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Some are giving away family pets or suddenly finding themselves in charge of babysitting siblings because parents can no longer afford child care. In the most drastic cases, some wind up living with relatives or even in temporary shelters for the homeless. "This housing crisis is taking away the innocence of our kids," says Phillip Lovell, vice president of education policy for First Focus, a Washington, D.C.-based bipartisan advocacy group focused on families and children.

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Researchers are beginning to study the impact of the current housing crisis on children, and their findings are bleak: An estimated 2 million children will be directly affected by the subprime mortgage crisis as their families lose their homes to foreclosures, according to an April report by First Focus. That number is considered low, the group says, because the study didn't include families who were renters when they were evicted as a result of foreclosures on their buildings, or families who bought homes with prime mortgages.

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More than 300 school districts in the USA have reported a rise in homeless children because of the foreclosure crisis, according to a soon-to-be-released report by the National Association for the Education of Homeless Children and Youth and First Focus. Areas that are absorbing the biggest surges include Michigan, California, Florida, parts of Illinois and the suburbs around Houston. As of April 1, Cleveland schools enrolled more than 2,100 homeless students, a 30% increase from last year.

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In Los Angeles, the school district has lost 8% of its enrollment over the past few years as many families who can't afford to stay in their homes have moved out of the area, says Monica Carazo, a spokeswoman at the Los Angeles Unified School District. A number of high schools had to let teachers go. Before, schools were so crammed, some children didn't even have desks.