Obama: Can't allow Fannie, Freddie to collapse

DAVENPORT, Iowa (Reuters) - Presidential candidate Barack Obama said on Monday the government cannot allow mortgage finance companies Fannie Mae and Freddie Mac to collapse.

The Democratic White House contender criticized the two companies for enjoying profits while the housing market was booming and then expecting U.S. taxpayers to come to their rescue.

But he said that their role in the financial system is too important to allow them to fail at this point.

"Here's the problem: If Fannie Mae and Freddie Mac collapsed, then probably the financial system would receive such a body blow that it could be disastrous," Obama said at a question-and-answer session with voters in Iowa.

"You probably couldn't get a mortgage," he said.

Obama, an Illinois senator, said that longer-term, it was important to look closely at the structure of the two government-sponsored enterprises and see if there might ways to make changes so that they do not pose risks to taxpayers.

"I think long-term what we have to do is, we have to go ahead and make a decision, if these are public entities, then maybe they ought to get out of the profit-making business," Obama said. "And if they're private entities, that we don't bail them out."

However, he added, "We're going to have to structure that carefully how we make that transition in order that we don't get the housing market even more spooked than it already is."

In recent weeks, shares of Fannie Mae and Freddie Mac have fallen over questions about whether the mortgage-finance companies can raise enough capital to protect themselves from the cost of mounting foreclosures.

Some on Wall Street warn that the companies' situation could grow so dire that Washington would have to take hold of the two government-sponsored enterprises and anxiety over such a move has cast doubt on the value of Fannie Mae and Freddie Mac shares.

(Reporting by Caren Bohan; editing by Vicki Allen)