Who are Fannie Mae and Freddie Mac?

The press has been full of concern at the dramatic fall in share price of Fannie Mae and Freddie Mac.

Who are they?

Fannie Mae (created 1938) is the Federal National Mortgage Association
Freddie Mac (created 1970) is the Federal Home Loan Mortgage Corporation

Between them Fannie Mae and Freddie Mac own or guarantee over half of US mortgage debt -about $6 trillion, of a total U.S. debt of about $12 trillion. (A trillion is a million million.)

The problem at the moment? The U.S. public are defaulting on their mortgages, and in a falling property market repossessions are not covering the debt. This is causing cash flow problems for Fannie Mae and Freddie Mac. The share prices are falling because investors believe they might go bust.

The U.S. government created these two organisations. Their function is to buy mortgage debt from mortgage lenders, and then either hold it, or sell it on to other institutions. They act as a mortgage factoring company.

The advantage to mortgage lenders is that the cash released enables them to go and sell still more mortgages. The advantage to the US government is the stimulation of the economy by encouraging the promotion of borrowing. The advantage to the public is that it's easier to get a mortgage.

The big disadvantage? Creating one big mortgage market makes the whole thing very vulnerable when times get hard. Imagine if we decided to have one big river instead of lots of little rivers. If that one river got clogged, all our resource would be threatened.

Global giants are efficient and strong most of the time. Yet when their ankles are tied, having no way to spread their vulnerability, giants fall more easily.