Averting a rescue

As it turns out, the takeover of IndyMac Bank last week was just a warmup exercise for federal regulators. Not that IndyMac was small potatoes -- the bank had $32 billion in assets, and its failure is the second largest in U.S. history. But even IndyMac pales in comparison with Fannie Mae and Freddie Mac, the government-sponsored enterprises that provide funding or guarantees for about $5.2 trillion worth of loans.

That’s why, when investors drove Fannie’s and Freddie’s shares down sharply last week, the federal government had no choice but to step in. The Federal Reserve agreed to offer discounted financing to the two companies, and the Treasury Department said it would seek Congress’ permission to increase their credit lines and, possibly, buy some of their shares. The moves, which helped stabilize their stocks, effectively pledged a federal bailout in the event that either or both failed.

Now that taxpayers are more or less committed to pay the tab, the top priority for lawmakers and regulators should be avoiding the need for such a rescue. To calm panicky investors, Fannie and Freddie need to increase their ability to withstand billions of dollars in loans going bad. If the stock market can’t be tapped for the extra capital, the Treasury Department should be given the power to buy shares. At the same time, Congress needs to finish work on a long-delayed bill (HR 3221:HR03221:%40%40%40D&summ2=2&) to improve the regulation of Fannie and Freddie. The measure also would attempt to help troubled borrowers by offering federal guarantees for refinanced loans when lenders forgive some of the debt and reduce the monthly payments. The approach has some notable flaws, but Washington can and should do more to help lenders avoid foreclosures when feasible.

The more foreclosures that can be averted, the less damage that will ripple through the banking system and the economy in general. And that’s important because the problems at IndyMac, Fannie and Freddie aren’t isolated. Investors have been abandoning other lenders with large portfolios of risky, exotic mortgages, and numerous community banks could be toppled in the coming year by mounting credit troubles among consumers and businesses.

Addressing the excesses that sparked the credit crisis, the Federal Reserve approved new rules Monday that would require lenders to verify subprime borrowers’ assets and assess their ability to repay the loans. The rules don’t go as far in some important respects as AB 1830, from California Assemblyman Ted Lieu (D-Torrance), which is in limbo in the state Senate. But at least the Fed is doing something about predatory lending, as late as it may be.