Fannie Mae and Freddie Mac are two government agencies who created, and remain highly involved in, the secondary market for mortgage-backed securities. They now own or guarantee about $1.4 trillion, or 40%, of all U.S. mortgages, with $168 billion in subprime mortgages. Find out how the two agencies support the secondary market, which is supposed to help low-income families realize the dream of homeownership, and how that turned into the nightmare of the subprime mortgage crisis.
The Subprime Mortgage Primer
The subprime mortgage crisis started because banks and mortgage companies packaged risky loans and resold them on the secondary market, which was created by the legislation that created Fannie Mae and Freddie Mac. This legislation was supposed to help homeownership become more affordable. Find out how a good idea turned into a bad situation.Federal Home Loan Mortgage Corp (FHLMC)
Freddie Mac's holds $120.8 billion in subprime mortgages, too small a percentage of its overall portfolio to threaten the agency's viability. (Source: IHT.com Fannie Mae and Freddie Mac hold billions in subprime-backed securities, 7/30/07) However, Freddie reported a $2 billion loss for Q3 2007. In response, the agency will raise $6 billion in new capital through the sale of preferred stock to shore up its reserves. It will also cuts its quarterly dividend in half, from 50 cents to 25 cents. (Source: FTAlphaville, Freddie to Raise $6 Billion in Fresh Capital, 11/28/07)Federal National Mortgage Association (FNMA)
As a result of the subprime mortgage mess, Fannie Mae announced in August that it would skip a benchmark debt offering for the first time since May 2006. This is a signal that even the high-rated mortgage-backed securities offered by the agency are being rejected by the secondary market. At that time it was thought that Fannie Mae had enough cash to enable it to wait until the market improves. (Source: Fannie Mae Web Site, Fannie Mae Will Not Issue Benchmark Notes® in August 8/20/07)
In November, FNMA declared a $1.4 billion quarterly loss and announced it would seek $500 million in new funds. (Source: The Economist, The cracks are spreading, 11/21/07)
