When President Obama signed the Dodd-Frank financial reform bill last week, one thing was conspicuously missing: any sort of regulation of the mortgage financing giants Fannie Mae and Freddie Mac.

This is apparently because they are too big to touch and require their own legislation. The bill did, however, include a one-page (out of 2,323 pages) acknowledgment of the Freddie and Fannie problem and a request for an investigation by the Department of the Treasury, reports Cincinnati.com.

So how does this oversight affect you?

• How it works. Fannie Mae and Freddie Mac are GSE’s, or Government Sponsored Enterprises. Fannie Mae was created in 1938, and Freddie Mac in 1970. They are financial institutions that are supposed to help free up private institutions. Freddie and Fannie buy mortgages from primary lending agencies, so that the primary lending agencies have more money, enabling them to give more loans. If banks can give more loans, the thinking goes, more people may own homes.
• What happened. These and other GSE’s were under pressure during the Clinton and Bush administrations to provide more loans to low-income people, so that more people could be homeowners. Unfortunately, the risky subprime loans caused the housing market to crash, contributing greatly to the recession that we’re currently in. Of course, up until 2008, the corporations were showing modest regulatory capital, but then were deemed insolvent by the Department of the Treasury. As it turns out, both companies are in the hole by trillions of dollars.
• What will happen. The two companies are in a combined debt of about $5.6 trillion of liabilities and have already drawn $145 million from the government to keep from going under. And as a government-backed enterprise, who owns that debt? You, the taxpayer. Which is why it matters. And the government can’t just let these financial institutions go. Without them, the housing market will take a dive from which we’ll be hard-pressed to recover.

So what can be done to fix this? So far, it’s unclear.

The Obama administration has called for a conference on August 17 to discuss ideas and has set itself a deadline of January 2011 to decide on a solution, according to the Washington Post.

The choices are pretty clear: Keep Fannie and Freddie and find a way to make them work, or move back to the privatization of loans and either get rid of the mortgage giants or heavily regulate them.

Interestingly, the Obama administration seems to be leaning towards the second option, giving the impression that home mortgage is not an American right, but rather just part of the American dream. This a view traditionally held by more conservative members of Congress, but has been expressed by senior officials who are leaning towards policy goals that promote renting rather than home ownership.

The bottom line? A seventy-year-old government financing strategy could be turned on its head within the next six months.

So if you’re looking to extend a line of credit to purchase a new home, your search may be impacted one way or the other. Unfortunately, if you’re struggling with your own home mortgage and considering filing bankruptcy there is no current planned government bail out.