So, it's finally a fact: the pseudo-government bodies are now government agencies. About time, don't you think?

The alternative was to let them go bankrupt, which would force an asset sale of the bad bonds they hold, and a devaluation of the bonds they back. It would become very hard to get a mortgage for a while, and when it would become possible again, there would be more requirements put on lenders, and the costs of a mortgage would rise to reflect the real risk of default. The housing bubble would be over - prices would have to come down, and more people would continue to rent.

So why is nationalisation better? The intent is clearly to make sure that the government continues to artificially lower the price of mortgages. This will prevent the bubble from deflating further, and it puts in place all the ingredients for a new bubble to start.

And there's where the problem lies. During the bubble years, banks, real estate agents and home builders profit from the mispriced risk, offloading much of it on the government. When the piped piper comes calling, too much of the pain is transferred to the government, and hence the tax payer.

Moral hazard is a real danger in this case. The government simply shouldn't be in the business of helping to finance homes for anyone but the poor and lower middle class. If Fannie and Freddie aren't changed to become limited tools of government policy, the whole charade will simply start all over again. Unfortunately, everything indicates that the nationalisation of Fannie and Freddie is NOT going to lead to a change in their scope. They will simply be patched up and sent on their merry way again. Pointless.

Endorendil: The government simply shouldn't be in the business of helping to finance homes for anyone but the poor and lower middle class

LeRoy: Ah, but it is the upper middle class and even the downright rich who want the government to help them finance their homes. And what they want, they usually get. There is, after all, a pretty potent connection between money and political power. He who has the gold makes the rules. It's the capitalist version of the Golden Rule.

Fannie and Freddie were conceived to help everyone own their own home, even the rich. That was a structural flaw that isn't likely to be addressed. Even the idea that Fannie and Freddie will build down their portfolio isn't going to help, unless they are mandated to remain in the high-risk lending business (i.e. lending to people that won't get loans from traditional banks). I think you're right and we'll find that a smaller (and newly risk-averse) Fannie and Freddie will focus their energy on making life easier for those whose lives are already easy...