WASHINGTON — Though many companies suffered sudden reversals of fortune in 2008, perhaps none were more dramatic than the fall of Fannie Mae and Freddie Mac.

Just 12 months ago the government-sponsored enterprises were regarded as potential white knights of the mortgage crisis that would be able to buy higher-priced mortgages and expand their mortgage portfolios to help stabilize the system. Lawmakers backed their attempts to lower capital standards, and the GSEs' lobbying capacities were the envy of almost every other industry in town.

Now their names have become synonymous with excesses of the housing bubble, their lobbyists and chief executives have been fired, and every decision they make is controlled by the U.S. government.

Their future appears more uncertain than ever. In the short term, the government has pledged to use Fannie and Freddie to continue to resolve the financial crisis and stabilize housing prices. In the long term, their public-private structure has been discredited, and a new debate has started about how they can be put back together again — and whether they should exist at all.

The companies are in "never-never land," said David Shulman, senior economist at UCLA Anderson Forecast.

The GSEs appear to be operating much as they did before they were seized by the government on Sept. 7, but that is unlikely to hold true for much longer. Their portfolios hold trillions of dollars of increasingly toxic assets, and policymakers agree a restructuring is overdue.

Short-term predictions see Fannie and Freddie serving as tools in the effort to stem the foreclosure crisis, including possibly buying back bad loans and modifying them and helping refinance mortgages through altered appraisal procedures.

But previous attempts to use the GSEs in this way have gained little traction. Congress allowed them to buy higher-priced mortgages in high-priced areas early last year, and the government has since allowed them to expand their portfolios. After years of struggle, lawmakers succeeded in enacting a bill that created the Federal Housing Finance Agency and gave it new powers over the GSEs.

Some observers now say Congress focused on the wrong issues and took too long to pass reforms.

"Fannie and Freddie were fighting tooth and nail against having the regulator have the authority to set capital," said Wayne Abernathy, executive director of financial institutions policy for the American Bankers Association, and a former Treasury official. "Now it's absolutely clear that the regulator had to have the authority to set capital standards."

James Lockhart, the director of the FHFA, said Congress allowed capital standards to be lower for the GSEs because mortgages were considered safe — a move that many now regret. He said their lack of capital ultimately bred investor doubts about the companies and forced the government to place them in conservatorship.

"The main issue here is that Fannie and Freddie, despite all the efforts to have them raise capital — and they raised $20 billion — it was not enough to cope with that $5 trillion book," Mr. Lockhart said in an interview.

Richard Baker, the former chairman of the House capital markets subcommittee, who pushed for GSE reform, said Congress made a mistake last year in raising the conforming loan limit.

"The enterprises should never have been allowed to expand their portfolios," said Mr. Baker, who now runs the Managed Funds Association. "You move to raising the conforming loan limit and expanding the lending practices at a time when you should have been restricting lending activity."

With a high leverage ratio, the GSEs had little protection from damage caused by increasing defaults on mortgage loans. As anticipation of heavy losses at the enterprises intensified, their stocks plunged, causing wider panic in the financial markets and resulting in the government's takeover.

Though critics have questioned whether conservatorship was necessary, Mr. Lockhart said he has no doubts.

"The only possibility" other than conservatorship "was to be even more aggressive in the capital raising, which we did very much encourage them to do," he said.

Though they were suffering large losses, the GSEs had to expand their portfolios to support the broader market, Mr. Lockhart said. "If they hadn't kept up business, the mortgage market would have gotten into trouble earlier," he said.

Mr. Lockhart said he remains committed to using the GSEs to stabilize the market.

"An important thing that Fannie and Freddie can do — and they've already been doing it over the last year — is to really help keep the pendulum from swinging too far in the other direction," he said. "I think that everybody knows that Fannie and Freddie took too much risk in 2006 and 2007 … then we started having them set better standards in the marketplace."

He said making sure lending standards do not tighten too much is critical, and that the GSEs could be standard-setters in other areas as well. Fannie and Freddie have begun waiving new appraisals for some refinancing efforts. "They already have the credit, so they're not increasing their credit risk at all," Mr. Lockhart said. The program is small now but could be expanded if it proves effective.

In another attempt to influence industry standards, both GSEs implemented a new loan modification program on Dec. 15.

But some want the companies to go further. Peter Wallison, a fellow at the American Enterprise Institute and a member of the Shadow Financial Regulatory Committee, said Fannie and Freddie should be required to buy loans held by servicers and investors and refinance them.

"We should make it clear that this is going to cost the taxpayers a lot of money, but it's necessary to save our economy from an enormous problem," Mr. Wallison said.

There are other ways the GSEs could influence the secondary market, some observers said. The Treasury Department's Troubled Asset Relief Program was originally designed to have the government mop up toxic assets, including mortgage-backed securities. That role could be filled by Fannie and Freddie.

"There has been talk of Tarp getting involved in buying those private-label securities," Mr. Lockhart said, including discussions about whether "Fannie and Freddie could help in that effort."

Though he is focusing on ways Fannie and Freddie can be used to aid the broader market, Mr. Lockhart said efforts to stabilize the GSEs will not be complete until home prices level out.

"The key thing is, as the owners of over $5 trillion of mortgage paper, continued deterioration of mortgage prices will have a negative impact on them," he said.

The GSEs' long-term future appears even more clouded. Conventional wisdom had been that if the Democrats won the White House, they might make a bid to permanently keep Fannie and Freddie in government hands.

But President-elect Obama's choices as economic advisers may indicate a different plan. Lawrence Summers, the incoming head of the National Economic Council, is seen as more open to other approaches, while Gary Gensler, the incoming chairman of the Commodity Futures Trading Commission, has criticized Fannie and Freddie in the past.

Treasury Secretary Henry Paulson said in September he would offer his views on how to rebuild the GSEs before he left office. His next chance comes Wednesday, when he is scheduled to speak on GSE issues before the Economic Club. Democratic lawmakers do not appear to have settled on an approach.

"We've got to really come to grips defining what Fannie and Freddie are and what they are not," Rep. Maxine Waters, D-Calif., said in a recent interview.

The key criticism is that the GSE model — chartered by Congress with government backing, but with the companies answering to public stockholders — simply does not work.

"We've seen that privatizing the profits and socializing the risks certainly doesn't work," outgoing Sen. John Sununu, R-N.H., said in an interview. "I would hope that once the real estate markets have stabilized that we undertake the effort to reduce the exposure of taxpayers to the risks that these businesses take, and that would mean reducing the taxpayer subsidies for these private companies."

Privatization and nationalization are both options, but not everyone has ruled out the hybrid model. Mr. Lockhart said another version of it might work better.

"I haven't really rejected any model except for a pure government Fannie and Freddie," he said. "I think there may be a hybrid model that works — we obviously didn't have it. … There may be pieces of the two extremes: a private-sector model but then a government guarantee on mortgage insurance losses that are catastrophic."

There are also extreme options. Some have talked about letting the Federal Home Loan banks run Fannie and Freddie. Mr. Wallison said they should be broken up and essentially liquidated.

"We don't need the GSEs for the purpose of creating the same kind of securitization system we have today," he said.

Like regulatory restructuring, however, the debate over how to rebuild Fannie and Freddie has just begun. Many said the two are likely to become intertwined, and take some time to work out.

"My guess is the whole question is going to be, how does the system deal with counterparty risk and deal with entities that are 'too big to fail?' " Mr. Shulman said. "Fannie and Freddie are just going to be a part of it."

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