WASHINGTON The takeover of Fannie Mae and Freddie Mac places enormous power in the hands of a new regulator, which must balance pressure to stem foreclosures and aid the ailing housing market with the need to reduce taxpayers' final bill.
The Federal Housing Finance Agency is now firmly in control of the two mortgage finance companies, which own or guarantee about $5 trillion in home loans, about half the nation's total.
Created over the summer, the agency now has a direct hand in overseeing the companies' activities. It replaced the companies' board of directors under a process known as a conservatorship.
FHFA, for example, has the power to deflate the financial parachutes of the companies' outgoing top executives and set the salaries of its new ones. James Lockhart, FHFA's director, said Sunday that the new leaders' pay will be "significantly lower than the outgoing CEOs."
Though the government has shut down Fannie and Freddie's sizable lobbying operations, lawmakers and influential real estate groups will likely hammer on the agency to reshape the mortgage companies' role in the market.
Real estate agents, mortgage brokers and homebuilders, for example, are expected to lobby FHFA to roll back fees and ease lending criteria that Fannie and Freddie put in place this year to stem losses on defaults and foreclosures.
"The faster and more energetically (Fannie and Freddie) are in the game, the faster the anticipated bottom of the housing market can be reached," said Jerry Howard, chief executive of the National Association of Home Builders. "The more they squeeze, the more pain is felt through the entire industry."
Fannie and Freddie, for example, have hiked fees for borrowers without sterling credit, while asking for bigger down payments.
"Their underwriting is so tight now, it's going to stifle any demand that would normally be in the marketplace," said Guy Cecala, publisher of Bethesda, Md. -based trade publication Inside Mortgage Finance.
However, if the agency allows the companies' lending standards to slip too far, they risk worsening their financial problems and putting taxpayers on the hook.
Government officials, along with Fannie and Freddie's executives "have a very full appreciation right now of how much damage can be done with imprudent lending," said Douglas Elmendorf, a senior fellow at the Brookings Institution.
Consumer advocates and some Democrats are starting to call for Fannie and Freddie to help more borrowers facing foreclosure by modifying more loans.
"That's one advantage of the takeover," said Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee. "They were being torn between their private activities and their public mission. Now that's finished it's the public mission."
The companies already have increased payments to loan servicers companies that collect mortgage payments on behalf of Fannie, Freddie and other lenders to encourage them to help more borrowers work out their loan problems and avoid foreclosure.
But it's not enough, said Ira Rheingold, executive director of the National Association of Consumer Advocates.
"Fannie and Freddie weren't really doing what they needed to do to stop foreclosures," he said. "There's an opportunity for the government to take charge here and to do large-scale (loan) modifications."
Making these tough choices will be Lockhart, 62, a longtime friend and Yale fraternity brother of President Bush. Lockhart also has had top roles at the Social Security Administration and the government's Pension Benefit Guarranty Corp.
Lockhart hasn't tipped his hand yet about how the takeover will help troubled borrowers, emphasizing that it was designed to assist the broader housing market by pumping more money into the mortgage market.
Lockhart's press office didn't respond to e-mailed questions Tuesday.
One way to help borrowers may be to follow the new plan at IndyMac Bank, which was seized by bank regulators in July.
In a bold move, the Federal Deposit Insurance Corp. said it would switch most of IndyMac's seriously delinquent borrowers into loans capped at 6.5 percent fixed-rate loans.
The FDIC plan applies to homeowners with risky adjustable-rate mortgages. Many of these loans were made to borrowers with solid credit but little proof of their incomes, or small or no down payments.
Fannie Mae and Freddie Mac have also experienced soaring delinquencies on these types of loans.
Sheila Bair, the FDIC's chairman, has been urging mortgage lenders and servicers to develop comprehensive plans for modifying unaffordable loans, rather than doing it on a case-by-case basis. An FDIC spokesman said the agency would support any further efforts on that front.