Fannie Mae and Freddie Mac made housing affordable for most Americans for decades. However, they were structured as government sponsored entities, which meant they had to be profitable for shareholders while creating the secondary market that made resale of mortgages feasible. In early 2008, Fannie and Freddie stepped in to guarantee more sub-prime mortgages to reassure the housing market. As the subprime mortgage meltdown continued, the Federal government had to step in to rescue Fannie and Freddie themselves.
What Is Fannie Mae?
Fannie and Freddie expanded the housing market. (Photo:Justin Sullivan/Getty Images)
Fannie Mae is short for the Federal National Mortgage Association (FNMA). It was created in 1938 to establish a secondary market for mortgages insured by the Federal Housing Administration (FHA). In 1968, Fannie Mae became a shareholder-owned company that could buy any mortgages, not just those insured by the government.
How Is Freddie Mac Different From Fannie Mae?
Freddie Mac is the Federal Home Loan Mortgage Corporation, or FHLMC. It was created by the Emergency Home Finance Act of 1970 to create a secondary market for conventional mortgages. It then packaged these into mortgage-backed securities, and resold them to investors in the stock market. The difference between Fannie Mae and Freddie Mac is Freddie's mortgages weren't FHA insured.
Did Fannie and Freddie Cause the Mortgage Crisis?
Fannie and Freddie did not, by themselves, cause the subprime mortgage crisis. Legislative attempts to rapidly wind down Fannie and Freddie will not prevent another recession. Worse yet, it could further harm the housing market.
History of Fannie and Freddie's Role in the Mortgage Crisis
As early as August 2007, there were concerns about the impact of subprime mortgages on Fannie Mae and Freddie Mac. Freddie held $120.8 billion in subprime mortgages, too small a percentage of its overall portfolio to threaten the agency's viability -- or so everyone thought. By Q4 2007, Freddie reported a $2 billion loss. In response, the agency raised $6 billion in new capital through the sale of preferred stock to shore up its reserves. It wasn't enough.
Early Signs the Mortgage Crisis Could Capsize Fannie and Freddie
The Economist warned in 2007 that Fannie's and Freddie's ability to pump liquidity in the market could be compromised. This was despite the fact that subprime mortgages were only a small portion of the agencies' portfolios.
Fannie, Freddie and FHLB Provided 90% of Home Loans
By the end of 2007, Fannie and Freddie (and the Federal Home Loan Banks) provided 90% of the financing for new mortgages. Once the banks panicked, the two GSEs were the only ones making loans. After the recession, most banks would not give you a loan without Fannie or Freddie guarantees.
What Were the Costs of the Fannie and Freddie Bailout?
The government spent at least $150 billion to keep mortgage companies Fannie Mae and Freddie Mac functioning. The government has been managing the two government-sponsored enterprises (GSEs) since September 2008, when they were put into conservatorship by the Federal Housing Finance Agency (FHFA). It was supposed to be temporary, but housing conditions have not improved enough to let the government get out.The Future for Fannie and Freddie
Now that Fannie and Freddie are publicly-owned, they should stay that way, at least for the time being. Suggestions to privatize them again, or eliminate them and let the private sector take over, won't work. Why? The government has already tried to privatize the mortgage market, and all efforts have consistently failed.
