Fannie-Freddie primers

It's only one of the most serious threats to the U.S. financial system since the Great Depression. Trouble is it takes some doing to figure out why Fannie Mae and Freddie Mac matter so much to the national economy. Just understanding what these two companies do - and what connection they have with the government - has been a challenge. (Many of this morning’s stories include extensive explainers.) And once you figure that out, there's the question of whether the current crisis is a short-term reaction to the immediate housing troubles or something longer term and systemic. Among the experts, opinion seems split, which certainly doesn’t help those of us trying to get up to speed. Here's the thing: Fannie and Freddie are enormous companies with complicated missions. C'mon admit it: You may have heard of them, but up to now did you really know what they did? In a piece about the impact on interest rates (they could be headed up), the NYT summarizes the basic problem pretty well:

In the beginning, there’s a mortgage lender. It can lend you money it has taken in from deposits on checking accounts and certificates of deposit if it wants. But many lenders choose to sell most or all of their home loans once they make them, and then use the proceeds of the sale to make even more loans. Fannie Mae and Freddie Mac are the buyers for many of these loans, which makes them crucial to the continued ability of companies to lend money to you and me for a house. Freddie likens itself to a wholesaler supplying a retail store: the retail store is a bank selling money. Once Fannie and Freddie have bought enough loans, they turn many of them into bonds and sell those bonds to investors. Your mutual funds may hold many of them, something many consumers may just be noticing, after letting out a sigh of relief because they were not planning to buy or sell a home anytime soon. The mortgage financing system hums along until Fannie and Freddie have trouble raising money to buy loans, or it costs them more to raise the money. And that’s what is happening now.

Here's some other worthwhile reading:

Size is no guarantee on the US home front (FT)

Rescue Debate: Paulson Insists Fannie, Freddie Holders Lose (WSJ)

When faith is frayed (LAT)

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Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
Mark Lacter, business writer and editor was 59
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