Fannie, Freddie, and Your Friends at the Fed

Now that the duties and management of the Government Sponsored Enterprises (GSE) Fannie Mae and Freddie Mac are under the conservatorship of their regulator, it™s important to understand just how important they are to the financial well being of the entire nation and why they needed the support and oversight of the Federal Housing Financing Agency, created out of The Housing and Economic Recovery Act of 2008.

The Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Fannie Mae and Freddie Mac, buy and guarantee home loans, and repackage these loans for sale on the secondary mortgage market providing the liquidity necessary for banks to make more loans.   They are the largest holders of mortgage loans.   As such, the United States enjoys the ease of attaining credit and maintaining financial flexibility.   Without the solvency of these GSEs, credit as we know it would cease, the free flow of money would freeze, and the ability to obtain money would return to times not seen since the 1930™s.   The overreaching effects of allowing Fannie and Freddie to fail required the government to step in as these companies are too big and too important to let go.

Fannie Mae started life as a government agency during the Franklin D. Roosevelt administration to provide a secondary market for home loans.   In an attempt to balance the federal budget in 1968, it was converted to a private corporation.   Several years later to provide competition in the secondary market, Congress formed Freddie Mac under the auspices of the Federal Home Loan Bank System.   It has been a publicly traded corporation since.   Historically speaking, both GSEs have been intertwined under the regulations and review of the United States Government.   That an arm of the federal government now wards over Fannie and Freddie should not be disturbing.   It makes sense considering the situation our financial markets face.

The loss of confidence in the marketplace and the lack of liquid funds necessary for the potency of Fannie and Freddie to operate effectively necessitated the federal government to dismiss current management and take over all duties and powers.   For the time being, this move will provide stability by easing capital concerns, expanding its business concerns, and possibly loosening up credit standards to help stimulate the growth of new mortgages.   In the long run, Fannie and Freddie will facilitate a market for government backed mortgage debt.

© 2008 Michael S. Amers