Fannie Mae, Freddie Mac: The $5 Trillion Mess

[Purveyor]

<B>Fannie Mae and Freddie Mac were created by Congress to help more Americans buy homes. Now their shaky condition threatens the entire housing market. </b>

By Katie Benner, writer
Last Updated: July 11, 2008: 10:51 AM EDT

NEW YORK (Fortune) -- They own or guarantee $5 trillion worth of mortgages­ - nearly half of all the country's outstanding home loan debt - and they're crashing. Big time.

If Fannie Mae and Freddie Mac go under, it will wreak yet more havoc on an already wrecked housing market - making loans tougher to come by and possibly pushing hundreds of billions of dollars in cost on to U.S. taxpayers.

How could such a disaster have come to pass?

The two companies are so-called government-sponsored enterprises, created by Congress in 1938 (Fannie) and 1970 (Freddie) to help more Americans buy houses.

The companies' mandate is to maintain a market for mortgages - buying loans from banks, repackaging them as bonds, and selling those securities to investors with a guarantee that they will be paid. This makes lending more tempting for banks because Fannie and Freddie take on risks like missed payments, defaults and swings in interest rates.

But the companies are also publicly traded and try to maximize profits for shareholders.

As quasi-government programs, they've long carried an implicit guarantee that the feds wouldn't let them fail.

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Now the dwindling pool of mortgages, higher foreclosure risk, and a shaky interest rate environment have the companies on the ropes; and investors are beginning to lose faith in Fannie and Freddie.

Both firms told Fortune that they have enough capital to weather the storm and continue to support the nation's housing market.

And yet, Fannie has fallen 32% this week and 65% since the beginning of the year. Freddie plunged 47% so far this week and is down 75% since January.

Investors have lost faith that the companies can operate in their current incarnation without running into major problems.

If investors abandon these companies, what do we learn from this odd Frankenstein of a business model?

"Nobody every believed that Fannie and Freddie were truly private and they never should have been," says Whalen. "Now we will all have to pay for a company that has gone astray." To top of page

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CNN MONEY: http://money.cnn.com/2008/07/11/news/economy/fannie_freddie.fortune/?postversion=2008071110

[kentuck]

1. How many people here have mortgages with Freddie or Fannie??

Something tells me this is a big diversion to bail out the US Banking industry. Let their greedy asses go under! We should sacrifice for these people??

[ingac70]

2. ....

http://www.fanniemae.com/aboutfm/index.jhtml

[kentuck]

3. So they are bailing out the banks ?

thru the cover of Fannie Mae? Nice!

[sinkingfeeling]

5. They buy mortgages and recycle them as bonds. They don't hold and service mortgages.

What a 'bailout' would mean, is an additional $5 trillion to our nearly $10 trillion national debt. Further driving down the USA's credit worthiness and probably plunging the dollar even more. Foreign investors will avoid 'investment' in the US and may even start calling in the notes.

[kentuck]

6. Buy mortgages from whom?

:shrug:

[sinkingfeeling]

7. From lending institutions. Fannie Mae is part of the secondary market.

[kentuck]

8. Lending institutions?

Do you mean "Big Banks"?? :-) There seems to be a lot of diversionary language about who we are really bailing out? Who made the loans for the mortgages? The Banks or Fannie Mae? I understand that they back up the banks who make the mortgages with federal guarantees but they do not buy every mortgage - only the ones that are in trouble, is that correct?

[sinkingfeeling]

9. Any local bank or mortgage company or any 'big' bank or lender can have Fannie Mae

underwrite the loans. The vast majority of mortgages made in the USA today pass through either Fannie Mae (about 70%). They re bundle mortgages and sell those as a type of bond to investors. Anytime you apply for a loan at some bank or mortgage company, they will probably tell you that they will not 'hold' the mortgage but put it into the 'secondary market'. Some big banks, like Wells Fargo, will sometimes buy the mortgage outright and do the 'servicing' on it. That's what happened to mine: mortgage obtained through local bank and by the time the first payment was due, it was in the hands of Wells Fargo and still is 7 years later.

[kentuck]

10. Where does the buck stop?

Who is ultimately responsible for making the bad loans? Fannie Mae?

[sinkingfeeling]

11. The lending institution. Fannie Mae doesn't make loans to buyers. They

basically provide the underwriting.

[HCE SuiGeneris]

4. Companies like Ditech (GMAC) run ALL their conventional loans through

Fannie Mae underwriting. This is really bad news.