Fannie, Freddie can't do what they should

WASHINGTON (MarketWatch) -- The mortgage market is broken, and the two agencies that were created to address that problem can't do their job.

Unless someone finds a way to bring more money -- responsible money -- into the mortgage business, the housing slump will worsen and make a recession more likely.

But Fannie Mae (FNM:

Fannie Mae and

FRE61.16, +1.64, +2.8%) can't step in. Their federal regulator has grudgingly allowed the two to buy more mortgages for their own portfolios, but the increase is far too little to make any real difference.

The Office of Federal Housing Enterprise Oversight said Wednesday that Fannie and Freddie will be able to buy or securitize up to $20 billion more in mortgages over the next year. See full story.

That's a drop in the bucket compared with the estimated $250 billion in mortgage-backed commercial paper that's been wiped out in the past month.

If another source of financing doesn't appear soon, the number of mortgages underwritten will plunge, sinking the housing market even further and dooming more homeowners to repossession.

Fannie and Freddie -- the two federally chartered mortgage giants -- were created to provide financing for mortgages, and they've been successful, perhaps too successful.

The two companies grew so large, that some people began to worry that they had become too big to fail, and that the federal taxpayer would be called upon to rescue them if some horrible crisis erupted.

The companies created most of the problem themselves, of course, with shady accounting gimmicks and earnings management practices. They still haven't cleaned up their books.

The fact that the two companies became closely held subsidiaries of the Democratic Party hasn't helped their cause, either.

Republicans, in particular, have been at war with Fannie and Freddie and have been able to rein in the two companies' growth. No one missed Fannie and Freddie during the go-go days of the subprime excesses, when actual underwriting standards were seen as a relic of an ancient era.

But now the market could use some old-fashioned discipline and tons of money to help out the vast majority of lenders who play by the rules. Only Fannie and Freddie are designed to do that, but neither can, thanks to their own arrogance, jealousy from their erstwhile competitors and political posturing from both sides of the aisle.