Making sense of Fannie and Freddie

I just wanted to quickly comment on the recent bailout of 2 huge home mortgage corporations: Fannie Mae (FNMA) and Freddie Mac (FHLMC) by the US Government. Both companies have been short of money to finance their operations since late Spring with rumors about them going bankrupt first emerging in early July. Everyone knows that fewer and fewer homeowners pay their mortgages these days, but why did rising foreclosures hurt Fannie and Freddie so much? After all, they are reputable and well funded corporations. They were created by the US Government in the 30's and 60's and had its implied (although not formally expressed) backing.

The answer is quite simple: Fannie's and Freddie's role has been to buy mortgages from banks that lent money to first-time home buyers with poor credit, people with little or no down payment and other "at risk" borrowers. These are exactly the borrowers that stopped paying their mortgages first and their numbers are still rising every month. FNMA and FHLMC are funded in great part by international investment capital: insurance corporations, pension funds and foreign governments (yes!).

So why did the US Government put 200 billions dollars of American taxpayers' money on the line? Well, some corporations are too large to fail. Especially if they guarantee almost 50% off all mortgages in the country. That's 3 trillion (!) dollars worth of debt. If hit by such tremendous losses, banks would simply stop lending money to businesses and the entire economy would run out of funds to operate. No government would allow the entire banking system to freeze like that. The impact would be so catastrophic that economies around the world would probably not recover for decades to come.

American budget is already over 400 billion dollars in the red so taking even more debt certainly doesn't help our economy. Nevertheless, most of us would probably rather not wait and see Fannie and Freddie go under...

If you are interested in more information related to Real Estate and mortgage markets, please e-mail me at peter@a1agent.info or give me a call at 773-600-7395.