Jul
11
Fannie, Freddie and (Uncle) Sammy
Filed Under Sunrise on KGMB9
When the Dow dropped 200 points Friday to fall below 11,000 for the first time in two years, there were some who assumed it was set off by the latest record high oil prices — crude went to $147 a barrel for awhile — but the greater concern was something else.
Investors suddenly noticed that Fannie Mae and Freddie Mac together carry debt of more than $3 trillion. They’re worried that they might need a bailout and Uncle Sammy might not be capable of one.
Maybe we’d better start by explaining for the uninitiated, which is most of us, what (not who) Fannie Mae and Freddie Mac are.
Fannie Mae [NYSE: FNM] stands for Federal National Mortgage Association, while Freddie Mac [NYSE: FRE] stands for Federal Home Loan Mortgage Corporation.
Both are federally-sponsored enterprises, yet they are owned by shareholders and traded on the New York Stock Exchange.
Fannie Mae, founded in 1938 in the New Deal, is a mortgage lender and mortgage backer.
Freddie Mac, founded in 1970, buys mortgage notes, bundles them and resells them as securities.
Both have seen their debt balloon because of mortgage defaults and the resulting collapse of the mortgage-based securities market.
It is true that bailing out the two would give the federal government a burden it would stagger under: it would double the federal debt.
But it is not true that the two enterprises are in immediate need of a bailout.
Economists say the housing market would have to decline another 40% and the delinquency rate would need to reach 12% before things would be as dire as some stock traders seemed to think Friday.
And before things got to that stage, others steps that would help a lot could be taken by the Fed without anywhere near the difficulty that a full-blown bailout would entail.
Still, this shows once again why unscrupulous subprime mortgage lenders, though they look like upstanding citizens, were not, and should go to jail.
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Many thanks on the clarity of your explanations both in print and on the news. Yes, I get up early to hear your first televised info along with hearing & seeing Grace & Steve,oh yes and Jeff. Reading the mainland papers LA Times and New York Times-god forbid if the Advertiser or the Star Bulletin ever wrote anything on the current economic concerns locally. Which is why I ask? Couple of weeks ago-American Savings did something I still don’t quite understand-they sold big $$$ to what was the term “solidify” their banking structure. Is this what is happening on the mainland with Fannie Mae etc., and in part what prompted the bail out of Indy? Yesterday there was talk about a troubled bank list and number of bank failures expected in the next 18 months. In the past it took about 2 years for economic struggles on the mainland to reach Hawaii. I think its zooming faster. Despite the minimizing of the foreclosures here our little island’s housing market is known to be conservative. So if the big boys on the mainland are in trouble -where do we go to get the money here? Guess all I want is to hear some clarification. Even Bernacky’s (?-you know that guy who took over after Greenspan left) statements on the hill sound frightening for all of its soft sell.