Since Fannie and Freddie were implicitly backed by the Fed, they were able to leverage their capital much more than a normal bank in taking on loans -- only a few percent of their issued loans were backed up by real money. These beasts were designed to be too big to fail, and in the unlikely event that they did fail, the companies' histories indicated that the Fed would step in. This is a huge advantage for the two companies, and over the years they essentially squeezed other banks out of the prime mortgage market.

The entire housing market therefore depends on the ability of Fannie and Freddie to buy up the mortgage loans that other banks issue. Without them, the pool of available capital to support those loans would suddenly shrink dramatically, meaning much fewer loans can be issued. Meaning none of us could buy a house for the next few years.

The Fed is stepping in because (1) they created both companies originally, though they cut the umbilical cord at some point; (2) they're still tied into the companies' finances in various ways; and (3) crippling the housing market and setting off a chain reaction of more bank collapses is not something this economy needs, particularly in an election year. There are a few other government-sponsored enterprises that would also get this sort of rescue if needed. Boeing isn't one of them, but as a matter of national security, I doubt the government would allow them to fail. (I still can't quite explain why Bear Stearns got bailed out, but they did.)

The housing market does not need Fannie and Freddie. What it needs is a stable provider of liquidity (a broker for the secondary mortgage market). Let Fannie and Freddie fail, and simultaneously introduce an explicitly-backstopped liquidity mechanism/agency.

http://www.economist.com/finance/displaystory.cfm?story_id=1...

An extremely oversimplified answer is that it would hurt confidence in the dollar, which would further damage its status as the foreign federal reserve currency, which would cause further inflation in the US.

We are seriously compromising the well-being of future generations of this country in order to bail-out over-consuming house-owners and fat-cats in Wall Street. Absolutely outrageous.

http://en.wikipedia.org/wiki/Chrysler#Government_loan_guaran...

Given that the bonds are backed by mortgages taken out by those very same American taxpayers, it doesn't seem all that unfair. (And all those T-bills, as well as the mortgage bonds, were bought by dollars paid to overseas businesses to buy lots of cheap goods for American consumers).