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What is the big stink with Freddie Mac and Fannie Mae? How does this affect me as a non-homeowner?


Fannie Mae and Freddie Mac are government-affiliated agencies that buy mortgages and package them into securities much like bonds that are sold to investors. If that sounds familiar and unsettling, it’s because that practice, when tried by private-sector institutions in the middle of the last decade, helped to precipitate the crash in the housing market. Here’s what happened: When securitization became a fad, it brought many new investors and substantially more money into the housing market. As you might recall from Economics 101, when you have a lot more money available for more or less the same amount of stuff – houses in this case – it sends prices higher.
That was what Washington had in mind when it created Fannie Mae – its formal name is the Federal National Mortgage Association – in 1938 as part of the New Deal and in 1970 when it created Freddie Mac, the Federal Home Loan Mortgage Corporation, to provide competition for Fannie. Home prices had been depressed in the 1930s, but when private institutions tried mortgage securitization more recently, it was while the market was doing just fine. Because so much more money went into housing so quickly, it created a bubble that ended the way bubbles always do, with a bust.
What made the bust worse was that Fannie and Freddie, which by then were quasi-private entities with autonomous managements trying to turn a profit, decided to compete aggressively for business with the conventional banks. They became lax on credit quality, buying increasingly risky mortgages for securitization. When the housing market turned down, Fannie and Freddie essentially became insolvent and had to be nationalized.
This is where you and every other taxpayer come in. Because the two agencies controlled something like half of the $12 trillion in mortgages on American homes, the cost of taking over that book of business is going to be immense. Estimates for losses to the Treasury tend to cluster around $300 billion. Divide that by 120 million or so taxpayers and it comes out to $2,500 apiece. If you’re one of those taxpayers, the demise of Fannie and Freddie will affect you that much, give or take a few bucks. If you don’t own a home, then you will suffer that pain without any of the gain from loan modifications or homebuyer credits and so forth that Washington has dished out to try to support the market and assuage homeowners’ anger.
-Conrad de Aenlle