The dream of home ownership may be disappearing for future families in the US. Talk of disbanding Freddie Mac and Fannie Mae surfaced this week after reports by Freddie of a $113 million financial loss in the fourth quarter of 2010.The loss in large part is due to a quarterly dividend payment of $1.6 billion due to the US government on its 80 percent share in the mortgage entities. Fannie Mae also reported a loss for the quarter. In Treasury Secretary Timothy Geithner’s report to Congress this month he stressed that Freddie and Fannie will not default.The level of loss is much lower than a year ago when Freddie reported a $6.5 billion loss for the last three months of 2009. However, as of the end of 2010, the accumulated loss resulted in a $400 million negative net-worth. Freddie Mac in turn requested $500 million in financial assistance from the US Treasury Department. This prompted Secretary Geithner to suggest a phase-out of the entities altogether. Freddie and Fannie have been operating under federal conservatorship since a government take-over in 2008.Freddie Mac is an acronym for Federal Home Loan Mortgage Corporation. It was created along with sister enterprise Fannie Mae early in the 20th century after the great depression. They were both incorporated 1970 by Congressional Charter. Fannie Mae stands for Federal National Mortgage Association. The enterprises are publicly traded as FMCC-US and FNMA-US respectively. They are US government-sponsored-entities (GSE) created 40 years ago, with a vision of making home-ownership available for all US citizens. There mandates where to address different aspects of the capital markets surrounding the issuance of mortgages for individuals.The aim of Freddie Mac was to provide liquidity for mortgage lenders. It created a flow of funds by repackaging single-family and multi-family residential mortgages and issuing them as mortgage-pass through securities and mortgage-backed debt. Fannie Mae on the other hand was to target home-ownership for lower to middle income households. It was to buy and hold mortgages, then issue or sell guaranteed mortgage-backed securities. Some experts now ruminate that the two 40-year-old enterprises were the source of the breakdown in the mortgage finance market that brought the global financial markets to its knees.Peter Wallison of the American Enterprise Institute said on Bloomberg Television this week that starting in 1992 influence from the Housing Department Urban Development unit prompted the enterprises to undertake risky underwriting policies. He explained that Fannie Mae issued a 10-K to the Security Exchange Commission (SEC) in 2006 that blatantly warned it would be issuing unprofitable mortgages. Wallison went on to say that of the $27 million in subprime mortgages issued in 2008, some $19 million were coming directly from Freddie and Fannie. They were the source, not the result of the problem.Earlier in the week, Thomas Stanton a Fellow of the John Hopkins Institute noted he had identified the risk to the financial markets 20 years ago. He has written a book on the subject, ‘State of Risk’. He warned there is an inherent danger in a government owning a public company. There is a confluence of interests that results in disaster. As the public company grows in strength, it in turn seeks to lobby government which results in limits on the restraints of regulations. Any unwinding of the now troubled but gigantic enterprises must be undertaken carefully and over time. He warns that great care must be taken over the next five years not to further destabilise the mortgage markets.These government enterprises own or guarantee more than half of the homes in the US. Foreclosures of US homes remain high and problematic. Stanton reported that up to 13 million homes had been foreclosed. With home prices down by double-digits and not yet stable, the future losses for the enterprises are uncertain. Estimates range from $225 billion through the end of 2012 to more than $400 billion to the end of the decade. If the foreclosure process is “gummed-up” it will further hurt regional banks, along with the families current on their mortgages. As home prices fall, they may find they owe more than the own. The crux of the current debate is how to stop the defaults. It appears that the government is looking to punish those who were behind the failures that led to the financial free-fall. According to Bloomberg Financial, civil actions by the SEC may be aimed at executives of Freddie Mac. The enterprise was earlier informed by the US Attorney’s Office that it was being investigated for accounting, disclosure, and corporate governance matters. The SEC has been conducting employee interviews as part of an investigation for possible securities violations. Bringing culprits to justice will be little solace to those who have lost their homes. The actions are intended to keep decision-makers in the financial markets in-check. The long-term solution appears to be the demise of the enterprises themselves.Will it be the loss of the dream of home-ownership in the US which was nurtured by the availability of subsidised mortgages, perhaps not? Ginne Mae an agency fully backed by the faith and credit of the US government would still exist. It would be able to help create housing opportunities for low-income households. Those middle-income families at the margin will have to save more and start planning earlier. The availability of mortgages in the future may be managed directly by financial institutions with tighter credit standards. This will ensure future pools of money for mortgages, by protecting investors who were badly burned by poor credit underwriting. Many of the investors in mortgage securities are banks, insurance companies, and pension plans that rely on the $11 trillion mortgage market to provide a stream of income to meet their clients’ retirement incomes.Patrice Horner holds an MBA in Finance, a FINRA Series 7 License, and is a Certified Financial Planner (CFP-US). Any opinions expressed in this article are not specific recommendations, nor endorsements of any products. Individuals should consult with their banker, insurance agent, lawyer, accountant, or a financial planner for advice to address their personal situations.