There seems to be confusion as to what Fannie Mae and Freddie Mac are and what they do.

[sinkingfeeling]

http://www.howstuffworks.com/framed.htm?parent=mortgage.htm&url=http://www.hud.gov/offices/hsg/gse/gse.cfm

HUD regulates two housing government-sponsored enterprises, Fannie Mae and Freddie Mac (the GSEs), which were chartered by Congress to create a secondary market for residential mortgage loans. They are considered "government-sponsored" because Congress authorized their creation and established their public purposes.

Fannie Mae and Freddie Mac are the largest source of housing finance in the United States. Their Congressional charters require each corporation to achieve public purposes that include providing stability and liquidity in the secondary mortgage market, providing secondary market assistance relating to mortgages for low- and moderate-income families, and promoting access to mortgage credit throughout the Nation, including underserved areas.

In exchange for carrying out these public purposes, the GSEs are accorded various privileges that provide them with some benefits not available to other private corporations. These benefits include an exemption from state and local taxes (except property taxes) and conditional access to a $2.25 billion line of credit from the U.S. Treasury Department.

Even though Fannie Mae and Freddie Mac are Congressionally chartered, they are also private, shareholder-owned corporations that have been regulated by HUD since 1968 and 1989, respectively. Both GSEs fund residential mortgages by purchasing loans directly from lenders, such as mortgage bankers and depository institutions, and holding these loans in portfolio or by issuing mortgage-backed securities (MBS) that are sold to a wide variety of investors in the capital markets.

[barbtries]

1. thank you

i didn't know anything now i know a little. appreciate it.

[whistle]

2. So, why saddle these two corporations now with sub-prime mortgages that have gone sour

...due to bank fraud and consumer deception practices? This is yet another bailout for hedge funds and Wall Street speculators and a Bush-base strategy to kill Fannie MAE and Freddie MAC.

[sinkingfeeling]

5. The 2 corporations have taken losses, along with every other lender in the country, from some

sub-prime or risky mortgages, but they also are backing about 50 to 70% of all conventional mortgages in the country. Not all 'bad' mortgages are the result of sub-prime loans nor of consumer deception, I would estimate a good 50% of foreclosures are directly the fault of the borrowers who when after more than they could afford, put nothing down on their homes, borrowed from home equity, or chose adjustable-rate mortgages.

The so-called bailout proposed today by the Treasury, would not be bailing out the hedge funds and speculators who are losing their money based on the declining stock values of Fannie Mae and Freddie Mac. The Treasury intends to ask for authority to buy some of their stock, which might stop investors from pulling money out of the mortgage-backed securities.

http://www.news8.net/news/stories/0708/535606.html

"The proposed bailout includes three big steps: extending lines of credit with the treasury department for both Fannie Mae and Freddie Mac, giving treasury the authority to buy some stock to prop them up, and providing the Federal Reserve Bank authority to oversee both.

But the central bank's regulatory power can only be authorized by Congress. The two institutions hold or back half the country's $12 trillion in home mortgages."

[On the Road]

21. They're Not Really Being Saddled with the Loans,

They purchased the loans and now own them.

In fact, Treasury wants to prevent them from being saddled with the full weight of the bad loans to keep them from going bankrupt and maintain lending for home purchases.

[Warpy]

3. How works a Fannie Mae?

Mr. Friendly at the neighborhood bank writes a mortgage for Joe Sixpack who wants to buy a house. That mortgage represents depositor assets that are tied up in that mortgage. The bank therefore has a limited amount of mortgages they can write, meaning they'll want to limit loan terms to short periods of time, meaning Joe Sixpack had better be able to pay off a home loan within 5 years or less. Prior to the Depression, home loans were balloon mortgages that had to be renegotiated every few years when the ridiculous payments were set to kick in.

Since that didn't work, enter Fannie Mae in the Depression. What they did was buy the mortgage from the bank. With the pressure off, the bank could then write things like a 30 year fixed mortgage, meaning Joe Sixpack could take on a mortgage without working three jobs and dumpster diving for food. That widened the pool of people who were qualified to buy homes and increased the number of mortgages each bank could write. Since the longer loan meant more money coming in through interest over a longer period of time, everybody made money except Joe, who only started to pay off a decent amount of principal after the first ten years. However, Joe got a decent place to live and felt free to paint his walls purple and ceilings black, if he chose.

The problem now is that house prices are falling, unemployment is rising, and people are defaulting on those mortgages. Fannie Mae has been stuck with a lot of bad paper and shareholders are running scared.

[MannyGoldstein]

4. Profits To Shareholders, Losses To Taxpayers

(In a nutshell)

[sinkingfeeling]

6. If you had the money, you could either invest it in shares of Fannie Mae via the stock market or

buy mortgage-backed securities (MBS). If you bought the shares years ago and recently dumped them, then you lost money and no body is giving it back to you. If you own the MBSs and are still holding them, you're still getting yields on those. Fannie Mae has not failed to pay yields. What it's lacking is capital.

[MannyGoldstein]

7. Buying Stock And MBSs Involve Risk

Should I be paying because investors bet wrong? If I do have to pay because "they're too big to fail", then I want their assets and the ability to control them. These private corporations should be nationalized, not subsidized.

[sinkingfeeling]

8. How would you be paying for either shareholders or MBSs holders?

[MannyGoldstein]

9. By Permitting Them To Continue Ownership

If I need to bail them out, then I want the assets, and I want control so I can avoid further shenanigans that we'll need to bail out again.

[sinkingfeeling]

10. Who are you bailing out? Not the shareholders and not those who invested in MBSs, so who is it that

you are bailing out? All the fed is attempting to do is get more capital into them so they (Fannie and Freddie) don't fail.

[MannyGoldstein]

11. They Are Failing Because Of Investor Mistakes

If the taxpayers have to spend money to prevent the failure, then these companies should be taken from their current owners (shareholders), to be owned and operated by the government. At least we'll then have an asset to go along with our $trillion+ liability. Otherwise we only have a liability. If this happens, the investors will lose all of their investment. Maybe they'll use their heads next time.

The alternative is to spend tax money to prevent collapse, but not seize these companies. This will prop up share prices, but it will not give taxpayers the asset or the control.

[sinkingfeeling]

12. They're not failing because of investor mistakes. They're failing because of

high foreclosure rates, dropping stock market value, dropping home values, and investors taking their money elsewhere. I might agree that some of this lands on the management of the the two institutions, but can't see how the investors have caused this.

You seem to think that investors (MBS holders) were foolish. Investors have been buying these securities for decades, believing in the 'American Dream' of home ownership. The yields from Fannie and Freddie are almost as good as T-bonds. Why would you think these investors made a mistake? Fannie has made homeownership a possibility for tens of millions of your fellow citizens.

Do you really want to go back to the days when mortgage money was only available to a few within a community or when homes could only be owned by the wealthy? How would a local, small bank in the middle of Podunk, Iowa come up with the capital to finance mortgages? Put itself on the stock market? Make trips to China to sell securities? If a small bank has 1000 customers who each have $1000 in savings, it would only have $1 million to cover all the needs of its customers; checking accounts, personal loans, car loans, mortgages, etc. Might be able to finance a single home mortgage a year. Banks need capital to make loans.

[MannyGoldstein]

13. If The Investors Forced Change, They Would Have Changed

If the stockholders had ditched the stock because it was too risky, management's behavior would have changed. If MBS purchasers had refused to purchase MBSs because they were too risky, management would have changed.

MBS holders were clearly wrong - they're losing a fortune. Was their behavior foolish? Well, housing prices are now twice what they were in the 1970s, as compared to a median wage. Housing prices are now unaffordable, as proven by the bizarre mortgages that prevailed over the past few years which were all aimed at helping people "buy" houses that they could not afford. Does that sound like a smart thing to put money on? I looked at this all a few years ago and thought it was unsustainable, and that prices would have to drop, so I rented rather than purchased. I'm a reasonably smart guy, but I'm no expert.

The fundamental concept of MBS is reasonable, as is the fundamental concept of stock ownership. But owners should in no way be bailed out for bad guesses - that's very harmful to society. Heck, nobody bails me out for bad guesses. And since MBSs are such an important part of the market, the government should keep very, very tight control on them, because we know that the consequences of assuming too much risk with that much money can be catastrophic. So we're learning again what was learned in the 1920s and 1930s - that unbridled capitalism is very, very dangerous.

[sendero]

15. I agree...

... before this is all over the share value of FMN and FRE will fall to zero, as it should.

The govt will backstop the paper, but not the shareholders.

[sinkingfeeling]

17. I give up on you. Without Fannie Mae, home ownership in this country would be about 2%.

The holders of MBSs such as China, Belgium, Scotland, etc., will be pleased to note that you believe they have behaved foolishly. And how the hell you get that have Fannie and Freddie drove up real estate prices is beyond me.

[MannyGoldstein]

18. I Don't Disagree That Fannie Mae Is Useful

Events have simply demonstrated that it should be a public institution rather than private.

[soothsayer]

14. yeah, but for each $1000 in the bank, the bank can loan out what---$10k? $100k? i ferget the ratio

but same with Fannie and Freddie, which is probably why Fannie is pretty solvent with its $46B in capital on hand. Besides, they don't just hold paper---they hold PROPERTIES that can be sold if necessary, so even a foreclosure in the portfoliio is more like a haircut than a total loss.

[On the Road]

19. Yes, It Is a Haircut, but the Catch is

that financial institutions in general are extremely leveraged, so a loss of either profits or asset values is magnified twentyfold. Despite the desire to create appearances of solidity and wealth, lending is an extremely volatile business with a high risk of bankruptcy.

[fasttense]

16. These use to be socialized institutions.

When they were first created they were owned and operated by the government. FDR established them. They ran just fine until 1968 when they became private corporations. So we could just turn them into public corporations again.

[abelenkpe]

20. I agree, make them government owned again. nt