FREDDIE MAC AND FANNY MAE

Topics: Subprime mortgage crisis, Fannie Mae, Mortgage Pages: 8 (3108 words) Published: February 16, 2014
A quick recap of what has already been discussed leading into the next segment of this paper. Fannie Mae (FNM) was created in 1938 as a mortgage association and in 1968 it became a Government Sponsored Enterprise (GSE). Freddie Mac (FM) also known as the federal home loan mortgage association was created as a GSE. Both organizations were in the business for buying mortgages from banks and turning them into mortgage backed securities. The differences of the two GSE’s are that FNM would tend to purchase mortgages from commercial banks while FM would buy from thrift banks (Microeconomics). Both tend to purchase from various types of financial institutions today. Both FNM and FM revel in a government backed loan system that is also known as the GSE. A Government Sponsored Enterprise (GSE) is a publically designed corporation designed to reduce the cost of borrowing. Some of the ways being a GSE benefited; publicly traded corporations designed to reduce the cost of borrowing allowed them to hold government charters, have Regulators which were embedded in the Housing and Urban Development (HUD) as well as the Federal Housing Finance Association (FHFA) and it also made FNM and FM exempt from state and local taxes. The board members could be appointed by the president and the treasury department could purchase up to 2.25 billion dollars in securities. Before commercial banks sold mortgages to investment banks and then securitized them and turned them into debt, this was called the Gennie Mae (GNM) process. FNM and FM had already been taking mortgages and packaging them and selling them onto debt as a secondary mortgage market (Whalen). This market existed due to the long wait it would take banks to receive the money due by mortgages over a 30 year period, if the mortgage was bought on a 30 yr. loan. See Appendix G1. When FNM and FM would purchase those same loans and then sell them to a third party, they gave the banks the capitol necessary to finance mortgages. Then when FNM and FM buy the debt as a result they free up 15 years for banks to be able to write off the loan and are then able to offer more people in America the ability to purchase homes. The American dream of home ownership could never have been better during the course of FNM and FM. The next thing to recall about these two GSE’s, is that there was an implicit backing from the government on the debt it absorbed in relation to FNM and FM (White). Unlike explicit where the government would assume the debt; Implicit meant it only was implied consent with no guarantee to step in and shoulder the debt forged. It was because of this implied consent along with the title of GSE, having capabilities of capitol from the treasury department, many investors believed the government would back their debt. As a public company in 1989, earlier in 1981 FNM was allowed to purchase adjustable rate mortgages and in 1983 3FNM was allowed to invest in multifamily mortgages not just single family homes. Not only were the changes happening with what FNM could purchase but the cost at which they could purchase had also been changing. It was because of these indications that FNM and FM could form a monopoly of the housing market. Both the government and corporate business structures would invest in the housing giants because it was understood that they could not fail. This leads us to where the nation is today and our somewhat recovery of a collapse of our housing market and the economy. Were there any red flags that had gone unseen? Or could our government see these, but turn a blind eye? These are the questions we will face in relation to FNM and FM and how the government all along planned the bubble and its precise timing. In 2007 FNM and FM debt was equal to all publically held debt in the United States combined. Figure G2 shows the debt held by private investors at 4.4 trillion and the Fed holding onto 0.7 trillion to equal 5.1 trillion dollars of debt held by...


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White, Lawrence H. How Did We Get Into This Financial Mess? Washington D.C. No 110. 2008
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