Fannie Mae and Freddie Mac are government sponsored enterprises (GSE). Yet they have shareholders and are profit driven. They play a critical role in the stability of the US mortgage market (and housing) by promoting liquidity, helping mortgage rates and availability consistent throughout the country.

One of the things that made them have a competitive advantage over others was their inferred backing by the federal government.

In the New Yorker this week, James Surowiecki writes in his column Sponsoring Recklessness

>The two companies have long been required to tell investors that their securities are not guaranteed by the federal government. But in the financial markets everyone has always assumed that this demurral was just window-dressing, and everyone, it turns out, was right. Last week, when fears of a possible collapse of the two companies threatened to spark a major financial crisis, the Treasury Department and the Federal Reserve quickly came up with a rescue package. What had been an implicit guarantee became an explicit one

Fannie was privatized in 1968 so president Johnson could move the debt off the federal books to help sell the Vietnam War budget, not to help the mortgage market.

Help to the consumer in terms of their impact on keeping low mortgage rates may be exagerated.

>A paper by the economist Wayne Passmore, of the Federal Reserve, suggests that in fact Fannie and Freddie have only a small effect on the interest rates that homeowners pay, saving them less than one-tenth of a percentage point.

The GSE self-preservation mechanism has been aggressive lobbying using former high placed government officials, very effective in enabling them to grow to $5 trillion in mortgage debt. A blip on the radar could cause more damage than Congress is able to burden the taxpayers with.

More than $10 billion in losses in the past two quarters, the GSEs (and FHA) are looking for more money to capitalize to help bailout the housing market at Congress’ urging.

Holden Lewis over at Bankrate wrote a great post on this last week called The GSEs and moral hazard.

Daniel Gross, my friend over at Slate and Newsweek, makes a better argument for the help GSEs provide to the taxpayer/homeowner suggesting that a bailout of the GSEs would actually be a bargain.

I guess I have a hard time accepting that anything the federal government would do would be a bargain and the long term concept of nationalization of the GSEs would be cost effective, but hey, I don’t have to refinance my mortgage.


  1. Steve Simon July 22, 2008 at 10:27 am

    Fannie, Freddie, (not Ginnie) have lost their way!
    July 13th, 2008
    The giants of the secondary market are in trouble. FNMA, FHLMC, the two largest private (but in reality quasi-governmental) buyers of bundled mortgage loan paper are no longer solvent. That ought to scare you!

    It doesn’t matter what business or industry you are in; it doesn’t matter what your age is or where you live (even out of the country) you should be concerned.

    The potential if these two iconic corporations failed could be as high as $5,000,000,000,000.00. This is not what you would call insignifican’t. The government will not let this happen, they can’t, chaos would reign. So they will litterally print up whatever the two need to survive, or worse they will take them over completely.

    If they opt for the “Bailout”, and simply create the needed money, then the value of everyone else’s money is diminished (the US Dollar will be worth even less on the Global Market. If they take them over, it will be even more complicated as they have to still fix the shortage and then they would have to run the two giants. Given their (the Government) record for managing operations large or small I believe this fix to be even more damaging than just a straight bailout.

    The solution is yet to be determined; but one thing is sure, this bears watching! Learn more about real esate and finance online.

    Posted in real estate

  2. Edd Gillespie July 22, 2008 at 2:41 pm

    Whatever happened to bring this mess about is history and unfortunately all any of us can do now is watch. My bet is the taxpayers will bail ’em out and the government will run ’em.

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