July 12, 2008

Freddie Mac and Fannie Mae: An Update.

Freddie Mac and Fannie Mae have lost most of their stock value in the past year. Investors are looking at the commitments they have been made and are uncertain that the twin companies actually have the financial health to keep those commitments.
As the primary source of funds for home buyers they hold a staggering $5 trillion in mortgages and mortgage-backed paper, an amount equal to the national debt.

Chartered by the federal government is to keep funds flowing back to mortgage lenders, both companies buy mortgages from lenders and bundle them into securities for sale to investors. They act as financial insurers and pledge to cover the payments if borrowers default. Both companies have the implicit backing of the full faith and credit of the US and offer a lot of muscle behind the promise to cover payments of their securitized mortgage pools.

Ironically, Fannie and Freddie were created by FDR as part of the new deal to help jump start the mortgage industry after the great depression causing one of three homes into foreclosure. This arrangement whereby, Freddie and Fannie buy mortgages from lenders and repackage for sale to investors recapitalizes lenders and spreads the risk of default by selling to investors world wide. The problem arises when even deep pockets arent big enough to assure payments.
They bought about two-thirds of the single-family-home mortgages that originated from January to March of this year and now they may not be able to meet their obligations.

If Fannie and Freddie have to pull back substantially in their lending to mortgage originators then housing and the stock markets will certainly take another hit. There are no other lenders right now in the U.S. mortgage market.

What Can Be done

Treasury Department and Federal Reserve officials have been considering some of the following options:

1. Allowing the companies to swap some of their holdings in troubled securities for public money.

2. Allowing access to government loans

3. Allowing them to tap an expanded line of credit from the Treasury.

Thanks for Reading

Howard Bell
A web site of over 450 articles related to real estate focused primarily on property management.

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