The Importance of Fannie Mae and Freddie Mac

These funny sounding names are actually the names of two very large government-sponsored entities that play very large roles in our economy. Fannie Mae and Freddie Mac buy mortgages from mortgage lenders like banks, credit unions and mortgage companies. The mortgages are then “packaged” into guaranteed pools and sold to investors, insurance companies and other institutions. The two companies also hold mortgages as investments for themselves. The two companies hold or guarantee over $5 trillion in mortgages, representing over half of all homeowner mortgages.

The US government established Fannie Mae and Freddie Mac to provide liquidity for the primary mortgage lenders so they could make more mortgages without tying up all their capital in long-term commitments. This increased liquidity has enabled more individuals to purchase their own homes. Their structure includes lines of credit from the US Treasury to borrow money if needed.

Starting in late 2007 and continuing through the first half of 2008, the housing and mortgage markets continued to erode and questions arose over Fannie Mae’s and Freddie Mac’s financial ability to stand behind their guarantees.

On July 30, 2008, President Bush signed the Housing and Economic Recovery Act of 2008 into law. This far reaching piece of legislation included several provisions giving the federal government the authority to take steps to provide financial assistance to Fannie Mae and Freddie Mac. The Treasury Department can provide an unlimited line of credit and buy stock in the two companies. It also is supposed to strengthen the regulatory oversight of the two companies.

These steps, along with other tax and economic provisions are intended to help restore financial confidence in Fannie Mae and Freddie Mac and the housing and mortgage markets in general.