The rebirth of Fannie and Freddie

  @FortuneMagazine June 28, 2013: 12:41 AM ET
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(Fortune)

On the morning of Feb. 11, 2011, Treasury Secretary Timothy Geithner gave a speech at the Brookings Institution near DuPont Circle in Washington, D.C., addressing the future of Fannie Mae and Freddie Mac. "We need to wind down Fannie and Freddie and substantially reduce the government's footprint in the housing market," he declared.

Geithner's position enjoyed remarkably wide support from lawmakers, regulators, and economists across the political spectrum. The prevailing -- virtually universal -- view was, and still is, that the twin colossi of housing finance that stuck taxpayers with a $189 billion bailout bill after their collapse in 2008, that inflated the real estate bubble with artificially cheap credit and hence helped sink the U.S. economy, should never, ever be allowed to regain their former dominance.

Today, 2 1/2 years after Geithner's principled pronouncement, Fannie and Freddie are bigger and more powerful than ever. Real estate is roaring back, and so are the players that, as much as any other, caused its crash. In fact, almost all the policy decisions that have been made since the government took control of Fannie and Freddie have failed miserably in the mission to de-emphasize their role in the economy -- instead giving the pair unintended but powerful advantages and squeezing out private competitors. The two institutions, now essentially owned by the government, are virtually the whole show in the mortgage market, guaranteeing 80% of all new home loans in America. That's almost double their market share before the credit crisis. In one of the strangest turns of events in the annals of business, Fannie and Freddie have rapidly morphed from epic money losers into unprecedented money machines.

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