Importance of Fannie Mae and Freddie Mac
These funny sounding
names are actually the names of two very large government-sponsored entities
that play very large roles in our economy. Fannie Mae and Freddie Mac
buy mortgages from mortgage lenders like banks, credit unions and mortgage
companies. The mortgages are then "packaged" into guaranteed
pools and sold to investors, insurance companies and other institutions.
The two companies also hold mortgages as investments for themselves. The
two companies hold or guarantee over $5 trillion in mortgages, representing
over half of all homeowner mortgages
The US government
established Fannie Mae and Freddie Mac to provide liquidity for the primary
mortgage lenders so they could make more mortgages without tying up all
their capital in long-term commitments. This increased liquidity has enabled
more individuals to purchase their own homes. Their structure includes
lines of credit from the US Treasury to borrow money if needed.
Starting in late 2007
and continuing through the first half of 2008, the housing and mortgage
markets continued to erode and questions arose over Fannie Mae's and Freddie
Mac's financial ability to stand behind their guarantees.
On July 30, 2008,
President Bush signed the Housing and Economic Recovery Act of 2008 into
law. This far reaching piece of legislation included several provisions
giving the federal government the authority to take steps to provide financial
assistance to Fannie Mae and Freddie Mac. The Treasury Department can
provide an unlimited line of credit and buy stock in the two companies.
It also is supposed to strengthen the regulatory oversight of the two
In September, 2008,
Fannie Mae and Freddie Mac were placed into conservatorship of the Federal
Housing Finance Agency. Under this conservatorship, the managements of
both entities were dismissed and the federal government took ownership
of almost 80% of each entity, have made significant contributions and
are running them. Various government groups continue to work on plans
to restore these entities that own or guarantee about half of the mortgage
These steps, along
with other tax and economic provisions are intended to help restore financial
confidence in Fannie Mae and Freddie Mac and the housing and mortgage
markets in general.