The Obama administration is mulling an expanded role for Fannie Mae and Freddie Mac as part of an overarching plan to stabilise the financial sector to be laid out on Monday, sources familiar with the administration's thinking said on Friday.
Under one scenario, Fannie Mae and Freddie Mac could buy up sour housing debts in order to rewrite their terms in favour of the borrower, the sources said. The two government-sponsored enterprises could then bundle and sell those new loans to investors or hold them in a government-backed investment warehouse.
One industry source familiar with the Treasury's thinking said the companies are expected to play a "major and active" role in the financial rescue plan that Treasury Secretary Timothy Geithner will detail in a speech on Monday. Since Fannie Mae and Freddie Mac were nationalised in September, the government-controlled companies have been retooled as agencies for housing aid. Both put a moratorium on foreclosures late last year, and are pioneering programs to let borrowers rent their homes after default.
Howard Glaser, a housing official under the Clinton administration, said the role being envisioned for the companies is in keeping with their new position as rescuers of the housing market.
"They are shifting from being a provider of mortgage credit to a foreclosure mop-up operation," said Glaser. "It may not be the best thing for the mortgage origination market, but Fannie and Freddie are the governments biggest tools to implement housing policy."
However, in the long run, the two companies could become bloated with bad mortgages to the point where they turn off investors. The initiative could work in tandem with some emergency measures already conceived by the Treasury and Federal Reserve to restore the credit markets to health. Last month the central bank kick-started a program to buy $500 billion in mortgage-based securities backed by Fannie Mae, Freddie Mac and Ginnie Mae - another government housing agency. The Fed has also promised to buy $100 billion in debt issued by the housing agencies.