To those of us at street level, the mortgage lending behemoths Fannie Mae and Freddie Mac resemble giant wheels turning in the sky--in fact if I wasn't working for brass, I might have just assumed "Freddie Mac" was this guy pictured on the left.
They're so huge, it can be hard for the average Joe to look up and take it all in. That is, until there's trouble. Over the past year, the state of the housing market has taken its toll on the industry's two biggest players. Now the giant wheels are in danger of going askew.
Mortgage or no mortgage, debt or no debt, Fannie Mae and Freddie Mac are big enough players in the economy that their situation could affect everyone.
Combined, the two government-created firms own or back about $5 trillion of home debt. That's about half of all the mortgage debt in the United States. So if they go under, it would be like a pair of hippopotamuses doing cannonballs into a pool. But the government won't let this happen.
This week, the Fed and Congress are pushing to come up with a rescue plan for the two giants. A report today in the New York Times says Congress could be asked to extend a $300 billion line of credit to help the two institutions.
To put things in perspective, together the two companies have lost about $12 billion since last summer and their stock share prices have hit 17-year lows.
So how does this affect us? According to a CNN Money report, with the home and credit markets having taken a beating, the two companies have been the largest (and virtually only) source for financial institutions to find funding for home loans. Want to take out a home loan? There's a pretty good chance either Fannie Mae or Freddie Mac make that loan possible.
This all comes on the heels of the failure of IndyMac last week, which was huge in providing home loans to people who weren't required to provide documentation of income. According to NPR, it was the second largest failure of a financial institution in U.S. history. Such a fold is big, but analysts say most financial institutions are quite safe, and IndyMac customers are FDIC insured.
Also, for all you students out there, I'd keep tabs on SLM Corp., aka Sallie Mae, which controls a huge chunk of student loans. According to Forbes Magazine, they're fairing better, but still feeling the pressure too. Check out Sarah's previous brass Blog post on the student loan crunch.
It's time for all of us to look up at those wheels in the sky and cross our fingers. Stay tuned everyone.
--Peter
Great post Peter! The Fannies, Freddies and Sallies are all familiar, though not often understood. Understanding their relationship to each other and the government is so helpful-- especially when they are backing so much debt! You also bring up the interesting point of understanding that the flux of the economy affects financial institutions, which in turn affects our bottom line. Nice post! Hope all is going very very well in brass landia :)
Thanks for the comment, Sarah. It's good for folks to understand these companies, although it's sad that people (myself included) often only learn more about such companies if something goes wrong.
Like a lot of folks, I'm left with questions asking how all this happened? I'm not judging, I'm in no position to really, but I'm curious to know. Still, I'm glad the government is able to step in to help, but we have to remember everytime it does, that's more taxpayer money spent that could have been used elsewhere.
Great article Peter. It is important for everyone to understand the implications of this sub-prime mortgage crisis. Thanks for writing about it. While much of the money in US banks is insured, how about 401k funds? Do you know if those funds are insured by some agency? Thanks again.
Post new comment