@realjohnboy,
The problem of the unstated but implied government guarantee of F&F had been discussed by economists for decades. There was no doubt that F&F were able to borrow money at reduced rates, based on this implied guarantee, to invest in the purchase of mortgages, thereby attracting more capital at lower rates to the mortgage loan market. This benefitted home buyers, home builders and realtors, but ultimately contributed very significantly to the housing bubble that collapsed in 2007, sending our financial markets into a tailspin. The process of securitizing and selling mortgage backed securities very significantly added to the 'moral hazard' experienced by banks and other mortgage originators. They needed only to guard against default for a few weeks until the mortgage was bundled with others into a security and purchased by F&F - not exactly the kind of situation needed to induce them to filter out buyers liable to default on their loans.
Perhaps the worst aspect of the F&F situation was that, as agencies completely dependent on the Federal government, they became thoroughly politicized. Thus Franklin Raines, a political aide & attorney to President Clinton - without any banking or financial experience - was, in effect, appointed by the president as CEO of Fannie Mae - earning about $60 million in bonuses during a four year tenure there. In 2003, when the first signs of excessive borrowing & mortgage securitization became evident, the Bush Administration tried to limit this activity and increase the ratio of "conforming" mortgages (those with at least 20% down payments) in those that F&F bought & securitized. This was instantly put down by the Democrat leaders in the House & Senate Committes involved as an unwarranted attack on their poor & minority constituents.
I see the conjunction of these two chronic problems as together dooming the practical usefulness of these institutions. The Democrats vociferously denied the two effects I identified above, however, the Administrations recent action to shut F&F down gives the lie to these denials. The Federal bailout required for F&F will dwarf those made to wall street banks.
I agree that mortgages will become more expensive, and, for many, harder to get without F&F. However, the damage caused by the collapsing housing bubble should also be weighed in that balance.
