What to Do About Fannie Mae and Freddie Mac?

It's been said that laws are like sausages -- it's best not to see them being made. If that's true, then you might want to avert your eyes when Timothy Geithner's Treasury Department on Tuesday hosts the first public forum on reforming how mortgages are financed in the U.S.

If the long, messy, politicized slogs of health care reform and financial regulatory reform were the equivalents of bologna and hot dogs, fixing government-controlled Fannie Mae and Freddie Mac -- guarantors of more than 70% of mortgage-backed bonds last year -- is probably going to wind up looking something like head cheese.

Fannie Mae and Freddie Mac have already blown through nearly $150 billion in taxpayer dollars to remain solvent. Freddie asked for another $1.5 billion a couple weeks ago after reporting its 12th-straight quarterly loss. The Treasury Department has promised unlimited aid, but it's understandable if this gargantuan sinkhole of taxpayer losses has folks calling for an end to endless bailouts.

A Linchpin of the U.S. Economy

Treasury Secretary Geithner promised to deliver a proposal for housing finance reform to Congress by January 2011, and today's conference marks the public beginning of what promises to be an exhausting -- if not exhaustive -- process. Economists, academics, investors and executives from Bank of America (BAC) and Wells Fargo (WFC) will convene in Washington to discuss "critical issues surrounding housing finance reform," as the official press statement puts it.

But this is no ordinary brainstorming session. The housing market accounts for 15% of U.S. gross domestic product, according the National Association of Homebuilders, second only to health care. The majority of Americans' household net worth is held in their homes, while total U.S. mortgage debt stands at about $10 trillion, or more than 75% of gross domestic product.

And, of course, people need a place to live.

Nationalize or Privatize?

Meanwhile, the housing market remains soft, especially in wake of the expiration of the new homebuyer's tax credit in April. That's partly why Federal Reserve Chairman Ben Bernanke said last week that the central bank will use the proceeds from its investments in mortgage bonds to buy government debt in an effort to keep long-term interest rates -- and therefore mortgage rates -- low.

Opinions as to what should become of Fannie and Freddie (and the functions they serve) range from complete nationalization to total privatization. Whatever the outcome, they're not long for this world as we know them today. Geithner promised in July that overhaul will ensure that Fannie and Freddie will no longer exist "in anything like their current form." With what they're costing taxpayers, that's one point on which there should be little debate.