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The Fannie Mae/Freddie Mac Controversy

By
Mortgage and Lending with Oak Valley Mortgage-California Home Loans and Refinancing

Fannie MaeFreddie Mac

There has been a lot of talk the past week and a half on Wall Street and through the United States Government about "solvency" issues that Fannie Mae- the Federal National Mortgage Association- and Freddie Mac may be experiencing, the "what if's" were they to collapse without the Government "bailing them out" and the impact it would pose on the existing status of our economy and housing market.

But before we go into those topics....

Who are Fannie Mae and Freddie Mac?

According to the "About Us" page of Fannie Mae's website, "Fannie Mae was created in 1938, under President Franklin D. Roosevelt, at a time when millions of families could not become homeowners, or risked losing their homes, for lack of a consistent supply of mortgage funds across America. The government established Fannie Mae in order to expand the flow of mortgage funds in all communities, at all times, under all economic conditions, and to help lower the costs to buy a home." You can learn more about Fannie Mae at: www.FannieMae.com

According to the "About Us" page of Freddie Mac's website, "Freddie Mac is one of America's biggest buyers of home mortgages, is a stockholder-owned corporation chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing." Essentially, they do the same thing as Fannie Mae.

These two entities are unique in that Fannie Mae (FNM) and Freddie Mac (FRE) are openly traded on the New York Stock Exchange, run like a publicly traded companies and held accountable to their stockholders, HOWEVER, the companies are unique in that they are "government-sponsored enterprises", established by federal law. This unique business structure allots each company "special privileges" in a sense that profits are redistributed through stockholders, but potential losses are passed onto the tax payer! Fascinating...isn't it?!

Both companies are highly regulated on the risks they can take on and hold nearly half of the mortgages owned in the United States!

"Solvency Issues"

Problem:

The major issue brought to the table with regards to Fannie Mae and Freddie Mac revolves around "solvency issues".

By standard accounting principles, it has been claimed that Fannie Mae and Freddie Mac are "insolvent".

I looked up the definition to insolvent on Dictionary.com and here is what I found:

In*sol*vent

-adjective

1.

not solvent; unable to satisfy creditors or discharge liabilities, either because liabilities exceed assets or because of inability to pay debts as they mature.

 

Source: Dictionary.com Unabridged (v 1.1)
Based on the Random House Unabridged Dictionary, © Random House, Inc. 2006.

Solution?

On July 14th, The Federal Reserve opened its lending window to Fannie Mae and Freddie Mac to head off any short-term funding problems and on Sunday, July 13th, Treasury Secretary Henry Paulson outlined a number of immediate steps Congress can take to bolster investor confidence in the two government-sponsored enterprises.

"Stock Woes"

Fannie Mae (FNM)

52 Week Range: $6.68 - 70.57

Closed out this past Wednesday at $9.25/share.

 

Freddie Mac (FRE)

52 Week Range: $3.89 - 67.20

Closed out this past Wednesday at $6.83/share.

 

Impact on the Economy

The Treasury secretary and Fed Chairman Ben S. Bernanke made statements recently that they are trying to prevent a collapse of the companies that would exacerbate the worst housing recession in 25 years and deepen the U.S. economic slowdown.

 

-Rate Volatility Meter-

Medium-Rates will take a few increases or decreases through the week, with movements of 0.25%-0.375% within a given day.

 

 

Scott Gormley

Written By:

Scott Gormley

Broker/Owner

Oak Valley Mortgage

Direct: 530-592-8362

Email: Scott@OakValleyMortgage.com

Website: www.OakValleyMortgage.com

"You Find the Perfect Home, We'll Find the Perfect Loan!"

Comments (9)

Associate Broker Falmouth MA Cape Cod Heath Coker
https://teamcoker.robertpaul.com - Falmouth, MA
Heath Coker Berkshire Hathaway HS Robert Paul Prop

I'm not sure allowing them to go the way of all things isn't the best option.  All their regs and guidelines (developed in your lifetime) have helped us get into this mess.  Technology, and the need to "bundle" mortgages, have caused the free market to push toward "compliance" with their policies and have dimished the free part of free market.

Jul 17, 2008 01:02 AM
Tracey Shrouder
360 Realty - Greensboro, NC
Listing Specialist

Good blog!  A lot of research went into that :) Helps clear it up a bit!

 

Tracey

www.360realtygreensboro.com

 

Jul 17, 2008 01:04 AM
Rob & Jeannie Steward - Realtors®
RE/MAX Advantage - Nashville, TN
We Work TWICE As Hard For You! - Ashton Group

Very precise and informative Scott. That capsulizes the 'woe' situation well. Good job!

 

R & J

Jul 17, 2008 01:06 AM
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

Scott -- Brad Inman did a great piece last week on this.  The entire economy depends on these two entities -- their demise would not just hurt the housing sector, but many other sectors of the economy as well.

Jul 17, 2008 01:34 AM
Larry Bettag
Cherry Creek Mortgage Illinois Residential Mortgage License LMB #0005759 Cherry Creek Mortgage NMLS #: 3001 - Saint Charles, IL
Vice-President of National Production

I'm the VP of a national mortgage company.  I love this post.  Insightful, researched, well thought out and informative.  Keep up the good work

Jul 17, 2008 01:40 AM
Jeff Dowler, CRS
eXp Realty of California, Inc. - Carlsbad, CA
The Southern California Relocation Dude

Scott - Informative post you have here. Helps to clarify alot.

Jeff

Jul 17, 2008 01:43 AM
Anonymous
Margaret

What does this whole bail out situation mean for home buyers?  Are they going to approve my loan or will it be even more difficult from now on?

Thanks!

Sep 07, 2008 04:53 PM
#7
Jim Crawford
Long & Foster - Fredericksburg, VA
Jim Crawford Broker Associate Fredericksburg VA

No one in real estate is acknowledging this, but this is the worse run of real estate, foreclosures and housing woes since The Great Depression!  I mentioned on a Blog I wrote today on the subject, that this is an event of historic proportions.  Pay attention, it isn't over yet.

Sep 07, 2008 05:49 PM
Anonymous
hitesh009

i am not sure allowing them to go the way of all things isn't the best option all their regs and guidlines have helped us get into the mess Technology,and needed to "bundle" mortgageges have caused the free market to push toward "compliance" with their  policies and have  dimished the free part  of free market.

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hitesh009
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adelaide mortgage broker

 

 

 

Jun 12, 2009 09:10 AM
#9