A big "what if" question loomed over Washington last week: What if Freddie Mac or Fannie Mae needed such large capital infusions from the Treasury that, in effect, they'd be directly controlled by the federal government … or at least open to drastic reorganizations?

As Fannie's and Freddie's stock prices plunged to historic lows -- under heavy pressure by Wall Street investors fearful of buying stocks or debt issues from either company -- the "what if" question became more significant for home buyers and mortgage applicants.

According to the trade publication Inside Mortgage Finance, Fannie and Freddie accounted for a combined 84 percent of all new mortgage originations in the second quarter of 2008. For decades they have been the dominant sources of mortgage capital for Americans.

But what if they were suddenly taken over, broken up into smaller companies, or nationalized. Would home buyers be shut out of the marketplace? Would FHA -- which now insures a fast-growing percentage of new home loans and carries the full-faith backing of the federal government - become the only game in town?

Here are some quick thoughts on that: First, final resolutions of Fannie's or Freddie's problems aren't fully in sight. But one thing is clear: Any move by the Treasury to shore up their capital bases shouldn't have an immediate or negative effect on borrowers.

After all, the Treasury would be backstopping the situation -- putting explicit federal support behind the companies' mortgage programs -- and that should calm jittery investors who currently aren't sure where the companies are headed.

Medium-term and long-term effects are less predictable, and heavily dependent on the specifics of any capital infusion, bailout or restructuring. Holders of Fannie and Freddie stock could well take major hits, but even under new management teams appointed by the government, Fannie and Freddie are likely to remain major market players in some form, buying and securitizing home mortgages.

There is some scuttlebutt that one of the companies -- Freddie Mac according to some reports -- may need a capital injection sooner than later, and could eventually be split into pieces and sold to private market investors. That sort of scenario would almost certainly affect borrowers.

But the good news for the moment is this: Whatever the Treasury does -- if anything -- would be with an eye on consumers' interests. The feds have no desire to cut the supply of mortgage money needed to support housing, and in turn, the larger economy.

So don't lose sleep over interest rates or loan availability ... at least not in the short term.

Published: August 25, 2008

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consumer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.