US Treasury Steps In To Take Over Troubled Mortgage Giants

Most people don’t have the foggiest idea about what Fannie Mae or Freddie Mac do – or how they affect them, personally – though most will tell you that they have heard of them.

Fannie Mae is the short name for The Federal National Mortgage Association, and was founded in 1938 as part of President Franklin D. Roosevelt’s New Deal. It’s principle purpose is to provide liquidity to the mortgage markets.

When banks and other mortgage lenders make home loans, they then sell those loans to Fannie (and Freddie) who then repackage those loans into pools – then resell them to investors; or they hold these loans, themselves. By reselling the loans to Fannie and Freddie, the banks have the liquid capital ready to continue making loans.

Fannie Mae started out as a government agency; however it was privatized in 1968 arguably to take it off the books of the federal budget. Since then, it has been considered a government sponsored enterprise (GSE), and as such has enjoyed an implied support from the federal government – as well as access to capital at lower cost than would otherwise be available without such support. You can not get a better guarantee than that of the US federal government.

In 1970, The Emergency Home Finance Act created Freddie Mac, which is short  for the Federal Home Loan Mortgage Corporation (FHLMC). Similar in purpose, Freddie Mac buys mortgages on the secondary market, then pools them as mortgage-backed securities and sells them to investors.

These two mortgage giants now hold nearly half of all mortgages in the nation, with $5 trillion in guarantees. It would be disastrous to let these GSE’s fail, though many people are concerned, understandably, with the effect on the taxpayer.

As with all other bailouts – the taxpayer will be on the hook, again. However, many argue that the cost of allowing these giants to fall is hard to calculate. The housing market has already been pounded by falling prices and activity – and to dry up the source of capital needed to facilitate most home mortgages would surely be disastrous to that market segment.

With the economy weak from both a real estate market in a recession as well as inflationary pressures from increased energy costs – if the credit markets dry up, it’s all over except the crying. The effect on the economy could actually push the country into recession.

I’m usually a small government kind of guy. But this is one instance where I believe the interests of the entire nation are best served by stabilizing our credit markets to help our battle-weary real estate market. The sooner we can solve the problems in the real estate markets, the sooner the country can return to prosperous growth.

Now they need to get to work on the energy crisis. 

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