It is clear now what a pivotal role the Federal National Mortgage Association (FNMA or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) played in the economic meltdown we are living through. These government run and supported entities encouraged the creation and sale of bad loans, purchased the same from vendors, then re-packaged the toxic waste and re-sold the loans to others (like Wall Street) who again re-packaged the toxic waste and convinced still other people to buy. Everyone who dealt with this junk got burned, and many more besides. The government owns a fair chunk of the blame for this mess (this goes back decades; both parties had a hand in this). Wall Street does too, as does Main Street. Plenty of blame to go around, but these Federally Sponsored Corporations are in the middle of the failure.

Freddie and Fannie, however, have the backing of the Federal Government (who can always raise taxes or print money to cover its bills). These two mortgage monsters have sucked in about $146 billion (that’s $146,000,000,000.00). One millionth of that figure would pay off my mortgage and leave enough to install solar. Worse, the bleeding is far from over. We easily have another $150 billion or so to shovel in this hole before we see bottom. The administration has committed to supporting them until 2012.

So if they had such a hand in the economic mess, why is there no urgency for reform in Washington? The Republicans have signaled a desire to move ahead, phasing out the mortgage giants in five years or so. The Democrats don’t trust the markets to fill the gap. The Federal Housing Administration (FHA), Freddie, and Fannie originate or purchase 90% of all new mortgages. Some changes will come and the government agencies will shrink, though not by much and not quickly. It would cause such turmoil if they just disappeared that it is unlikely that you will see them go. Also, these are very well connected agencies with many friends in DC.

What does this mean to you? With the federal agencies shrinking and private lenders tightening the mortgage lending market will remain subdued into the foreseeable future. It won’t get easier to get a mortgage anytime soon.

Jim Heitman, CPF Jim Heitman, CFP®, is a writer, speaker, and Certified Financial Planning practitioner in Southern California.