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!
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:
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.
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.
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.
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