Fannie Mae and Freddie Mac: Do you get it?

September 10, 2008 - 12:00 pm By Rob - UPENN

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?

Phil says:

September 10, 2008 at 1:32 pm

Of course all of this is taking place in a country that is trillions of dollars in debt, populated by people who think that the national government should always help them out if they are in trouble.
The government has helped out private companies before, look at the airline business. Almost every airline company in the US has been in debt at one point or the other. Many changes have been put into place (automated check-in, no free inflight meals, charging for checked luggage), but overall they are still able to run a failing business model because they have no incentive to change, when they mess up, the government will bail them out. That being said, the US needs the airline industry, so it is hard to say if it is a good or bad thing that the government has intervened.

Tyrone Biggums says:

September 10, 2008 at 1:52 pm

While I agree that it is a shitty thing to begin bailing out private companies that do not share profits with the general public, if FM/FM were to go under there would be far reaching global & financial ramifications.

John Grey says:

September 10, 2008 at 5:26 pm

“While I agree that it is a shitty thing to begin bailing out private companies that do not share profits with the general public, if FM/FM were to go under there would be far reaching global & financial ramifications.”

Hey, tough shit. If it’s not FRE/FNM, then it’s Lehman Brothers or CitiGroup or JPMorgan/Chase. If we try to backstop everyone, we’re going to find ourselves saddled with $7.5tn in mortgage-related debt that’ll never unwind. We’re facing a depression regardless. I’d much rather it be on my terms instead of having my taxes hiked 20-30% to keep the pigmen well-feld for a few years.

Roy Jones says:

September 18, 2008 at 2:35 am

This article makes me wonder if the title is supposed to be ironic because the author clearly doesn’t get anything beyond the ten minutes he spent on wikipedia. Fannie and Freddie aren’t required to purchase all mortgages… in fact, they’re banned from purchasing mortgages that don’t meet their guidelines (ie being under $147k, among other requirements). Second, both companies are supposed to act as intermediaries between those supplying mortgages and those buying them. Instead, due to the high profits those mortgages brought in, both decided to just hold them and collect. Too bad high risk portfolios are named so for a reason, and the riskiest were also the best paying. So when the market came crashing down, all these assets they held that they were supposed to SELL became devalued, and the companies suffered.

It’s not some flawed business plan that failed, but the greed of the company leaders.