Government Mulls Creating a "Bad" Bank To Hold Toxic Mortgage Loans

The Obama administration proposes to transfer delinquent mortgage loans from Fannie Mae and Freddie Mac to a new financial institution which will have the responsibility of going behind bad loans. The transfer will enhance the health of Fannie Mae and Freddie Mac. The government has pledged more than $1.5 trillion, including $85 billion in direct aid, to keep the mortgage market working through Fannie Mae and Freddie Mac. "It should come as no surprise that the administration is thinking through" significant changes to Fannie Mae and Freddie Mac, said Andrew Williams, a Treasury Department spokesman. "We are in the preliminary stage of the process, the systematic development of options has not taken place, and no decisions have been made."

The administration will make a final decision on the idea after discussions involving the White House, the Treasury, the Department of Housing and Urban Development and the Federal Housing Finance Agency. "The government's efforts so far have taken the risk out of those two firms," said Treasury Secretary Timothy Geithner. "The only question that remains is what form, what structure they ultimately will take."

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