News, insight and some thoughts about the Sacramento-area real estate market

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July 13, 2008

Sunday suspense and new criticism of Fannie/Freddie

Friday's Wall Street drama over Freddie Mac and Fannie Mae was only 48 hours ago, and the saga continues through the weekend.

 A couple of updates:
This from The Los Angeles Times housing blog, L.A.Land about one report of a possible $15 billion federal rescue today or tomorrow.

The New York Times also has a rather harshly critical story of the two mortgage giants and how we got to this point.

  Many people still don't know what the heck either of these two institutions are or what they do. I refer you here to a Q& A that I put together for Saturday's Bee:

Q: What are Fannie Mae and Freddie Mac?

A: Fannie Mae is the Federal National Mortgage Corp., founded in 1938. Freddie Mac is the Federal Home Loan Mortgage Corp., founded in 1970. Congress established both corporations to help make homeownership more affordable to low- and middle-income Americans. Both are publicly traded corporations backed by the U.S. government.

Q: What do they do?

A: The two firms buy mortgages from lenders, who use the money to make more home loans. In essence, this keeps money flowing into the home loan market. After buying the mortgages, Freddie Mac and Fannie Mae bundle many of them into securities that they then sell to global investors. But they also hold many in their own portfolio. It's estimated the two firms buy about half the mortgages in the United States. They own or guarantee about $5 trillion worth of mortgages, about half the outstanding U.S. mortgage debt. They don't buy risky subprime loans or loans above $729,0000.

Q: Then what's the problem?

A: As more people default on even standard mortgages, the two corporations are facing an unknown level of financial losses on mortgages they've bought and guaranteed to investors. Despite official assurances that the two have enough money to keep making loans - and reports that the government and Federal Reserve will back them - the financial markets have been jittery about their financial condition.

Q: What would happen if they fail?

A: That's the unthinkable event. It would remove the single largest source of money for home loans at the very time a struggling housing market needs buyers.

Q: If I have a home loan, does this affect me?

A: No.

Sources: Fannie Mae, Freddie Mac, Bee research

Posted by Jim Wasserman, July 13, 2008 2:08 PM