Why the Feds Want to Stay in the Mortgage Game

The future is here, and not a moment too soon. Tomorrow, Treasury Secretary Timothy Geithner and HUD Secretary Shaun Donovan, pictured left, will host a conference on the future of housing finance. Before you click away or fall asleep -- pay attention. What's at stake is nothing less than whether or not you -- or the buyer to whom you'll sell your house to one day -- will be able to get an affordable, long-term mortgage, no matter what the state of the economy.

Fannie Mae has been guaranteeing this since 1938, Freddie Mac since 1970. Their original mission was to level out the ups and downs of mortgage lending by creating giant pools of money for home loans that banks could dip into whenever they needed it, whether those banks were flush with deposits or had hit a dry spell.

Of course, the Fannie and Freddie story has had a much-less-tidy ending, as deregulation led private competitors to undercut them with subprime lending – and Fannie and Freddie made a fatally bad decision: "If you can't beat 'em, join 'em." They're now both under government conservatorship.

Some critics, like former Federal Reserve Bank of St. Louis chief William Poole, have suggested that the United States doesn't need institutions like Fannie and Freddie anymore, because the private sector has now figured out how to turn mortgages into securities and sell those to investors.

We all know how well that worked out last time around.