But here’s the thing: Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.

Partly that’s because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn’t do any subprime lending, because they can’t: the definition of a subprime loan is precisely a loan that doesn’t meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.

So whatever bad incentives the implicit federal guarantee creates have been offset by the fact that Fannie and Freddie were and are tightly regulated with regard to the risks they can take. You could say that the Fannie-Freddie experience shows that regulation works.

Together, Fannie Mae and Freddie Mac form the cornerstones of the U.S. mortgage market and own or guarantee more than $5 trillion worth of American mortgages -- or almost half the home loans in the country's roughly $12 trillion mortgage market. Over the past year, the companies have recorded combined losses of around $14 billion.

For months, investors and political figures fiercely debated the idea of a government takeover or some other form of rescue. Critics of the idea -- including many Republicans and longtime opponents of the two mortgage agencies -- had argued the firms own mismanagement caused their downfall and should be allowed to fail.

However, damaging accounting scandals, questionable management, inadequate capital reserves and a crashing residential real estate market proved too much for even the Bush administration. During an election year in which the housing market meltdown has become a central issue, the market lost confidence in the government-sponsored mortgage entities and their financing costs rose to unsustainable levels.

Republican and Democratic leaders alike began to call for Washington to take greater steps to safeguard the capital structure of the GSEs, for government-sponsored enterprises.

Their demise and rescue promises to have an impact on how Americans buy and sell houses for years to come.

[...]

Fannie and Freddie were also generally allowed to have less capital in reserve than other financial firms, so when the mortgage bubble burst and the contagion spread from low-quality loans to the higher quality loans Fannie and Freddie deal with, they had less of safety net.