freckles make me strong.

dihard:

Who (or rather what) They Are:
No, they’re not real people.  They are nicknames for companies:
Fannie Mae = Federal National Mortgage Association
Freddie Mac = Federal Home Loan and Mortgage Corporation
They have some friends:
Ginnie Mae = Government National Mortgage Association
Farmer Mac = Federal Agriculture Mortgage Corporation
Sallie Mae = Student Loan Marketing Association (with whom I am great friends).

Fannie and Freddie are government sponsored enterprises (GSE’s). That means they were chartered by Congress, backed by the US government, and are authorized to make loans to home-owners. But they’re owned by shareholders, not the government.

Their Origins & What They Do:
Fannie, founded in 1938 as a government agency but taken private in 1968, was part of Roosevelt’s New Deal to promote home ownership in the US. It purchases the debt from mortgages that banks make to home-owners. This gives the banks more money to make more loans to more people who want to buy more homes.

(Don’t understand mortgages? A mortgage is basically a loan that lender gives to you to buy a house or piece of real estate. Your collateral, in return, is your house. The bank has a claim on your house if you cannot make payments on the loan. That’s when foreclosure happens – if you can’t repay your loan, you property is seized & you’re kicked out.)

Freddie was founded in 1970 to expand the secondary market for mortgages. The “secondary market” is where Freddie buys up loans made by banks, bundles those loans into megaloans (Mortgage-Backed-Securities), and sells those to investors all over the world. The money that the banks receive, again, gives them more money to make more loans to more people who want to buy more homes.

Though Fannie and Freddie are not funded by the US government, they are able to borrow more cheaply than other public mortgage lenders. Together, F&F provide the bulk of funding for US home mortgages, about $5 trillion of home mortgages outstanding.

Fannie & Freddie Facing Trouble:
They’ve had much face-time in the press lately, with rumors of default and the need of a bailout. That’s because so many home-owners have defaulted (all part of that sub-prime mess). See, when F&F buy the mortgages from the banks & sell them to the investors, they take on the responsibility of making sure the homeowners repay their loans. If they don’t, F&F has to foot the bill; thus F&F have losses of about $11 billion combined.

Though the Fed & US Treasury appear to be coming to the rescue, announcing today that they will firmly back Fannie & Freddie. If they didn’t and F&F went under, “it would be as close to a disaster as I can think of” says Bill Seidman, former chairman of the FDIC.

Here’s a good explanation about the current situation if you’re interested.

This is a great laymen’s breakdown of the situation.  The Economist discusses the federal bailout of Fannie and Freddie.

“Capitalism rests on a clear principle: those who get the profits should take the pain. For the system to work, bankers sometimes need to lose their jobs and investors their shirts.”  

Should we have let them fail?  The article discusses why we might have nationalized these mortgage giants.  Financial ruin for the companies and many others has far reaching consequences and the temptation of the federal government to intervene is understandable. However, if the US government is going to come to the rescue, why shouldn’t it also share in its success?