Fannie Mae and Freddie Mac: Do you get it?

By Rob

Let us begin in the beginning…

Freddie Mac’s full legal name is the Federal Home Loan Mortgage Corporation and Fannie Mae is the Federal National Mortgage Association.

Fannie Mae was created in 1938, under President Franklin D. Roosevelt, at a time when millions of families could not become homeowners, or risked losing their homes, for lack of a consistent supply of mortgage funds across America. The government established Fannie Mae in order to expand the flow of mortgage funds in all communities, at all times, under all economic conditions, and to help lower the costs to buy a home. In 1968, Fannie Mae was re-chartered by Congress as a shareholder-owned company, funded solely with private capital raised from investors on Wall Street and around the world. Freddie Mac was created in 1970 to support the same operations as Fannie Mae.

The problem was, that local mortgage providers were running low on cash to distribute for loans, furthermore there was a need to redistribute and spread out the risk on the loans. For example, if there were $10M in loans out in a small town and half of the loans defaulted ($5M), it could cripple the town’s financial structure and essentially bankrupt the local banking system. With Frannie/Freddie creating the “secondary loan market,” the risk is now distributed across a larger investor base and since they have federal charters – they are obligated to help. There-in lies the problem.

The loans being issued in the recent years were high risk, but Fannie/Freddie were obligated to help spread out the risk. Unfortunately, an exhorbitant amount of defaults led to the absolute crash of the secondary mortgage market because by charter – they were obligated to purchase the shi**t loans…good times!

So what now? The US government has “temporarily” nationalized these two secondary mortgage behemoths. The major issue, is with the government taking over private companies. If we claim to be all about capitalism and free markets, then we really have to act that way. Will the government bail out GM next? Ford? Because the US auto industry is almost just as screwed as the mortgage market. Now, those companies have a precedent to say, “Hey, why doesn’t the government bail us out too?” What the mortgage bail out has done is covering the potential risk completely. What about all of the years of Fannie/Freddie profits? I didn’t see sh*t from that! But now my taxes are going to cover the losses?? F*ck that!

Ok ok ok, YES. There would be a MAJOR financial crisis, but we would survive. How? Banks and home owners would need to find a way to cover debt. Re-structuring and probably a smarter way to handle debt than we currently are. We have almost completely eliminated risk for Fannie/Freddie investors now. Maybe I should have bought a $1M house like the rest of the idiots who had no right owning a home?