Freddie mac and fannie mae

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It is this monopoly, combined with the government's implicit guarantee to keep these firms afloat, that would later contribute to the mortgage market's collapse. With their funding advantage, they purchased and invested in huge numbers of mortgages and mortgage-backed securities, and they did so with lower capital requirements than other regulated financial institutions and banks. Figures 1 and 2, below, produced by the companies' former regulator, the Office of Housing Enterprise Oversight , show the incredible amount of debt issued by the companies, their massive credit guarantees, and the huge size of their retained portfolios mortgage investment portfolios.

Treasury debt is used as a benchmark.

Federal takeover of Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac had many critics who tried to raise a red flag of concern about the risks the companies were allowed to take thanks to their implicit government backing. However, despite these early warning cries, Fannie Mae and Freddie Mac found many allies in Congress. While Fannie Mae and Freddie Mac's rivals, along with some public authorities, called for tighter regulation of the mortgage giants, the companies hired legions of lobbyists and consultants, made campaign contributions through their own political action committees, and funded nonprofit organizations to influence members of the U.

Congress to ensure that they were allowed to continue to grow and take on risk under their congressional charters and implied federal backing. It should come as no surprise that Fannie and Freddie's rivals on Wall Street wanted in on the profit bonanza of securitizing and investing in the portion of the mortgage market that the federal government had reserved for Fannie Mae and Freddie Mac.

They found a way to do this through financial innovation , which was spurred on by historically low short-term interest rates. They frequently had "exotic" characteristics such as interest-only or even negative-amortization features. Subprime lending took off.

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Investors such as pension funds , foreign governments, hedge funds and insurance companies readily purchased the sophisticated securities Wall Street created out of all the mortgages it was now purchasing. As Fannie Mae and Freddie Mac saw their market shares drop, they too began purchasing and guaranteeing an increasing number of loans and securities with low credit quality.

It's a simple fact that when home prices are rising, there is less risk of mortgage default. The equity in a home is the single biggest risk measure of default. Homeowners with large amounts of equity do not walk away from their mortgages, and can usually refinance out of a mortgage with soon-to-be-expected payment increases into another mortgage with low initial payments. This is the model upon which homeowners, mortgage originators , Wall Street, credit rating agencies and investors built the mortgage bonanza.

When the housing bubble burst, so did all of their sophisticated risk models. In , Fannie Mae and Freddie Mac began to experience large losses on their retained portfolios, especially on their Alt-A and subprime investments. In , the sheer size of their retained portfolios and mortgage guarantees led the FHFA to conclude that they would soon be insolvent. By September 6, , it was clear that the market believed the firms were in financial trouble, and the FHFA put the companies into " conservatorship ". Hi, Fool! Premium Services.

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Popular Stocks. How to Invest. Learn How to Invest. Track Your Performance. Retirement Planning. Personal Finance. The Ascent is The Motley Fool's new personal finance brand devoted to helping you live a richer life. Let's conquer your financial goals together See you at the top! For the first thirty years following its inception, Fannie Mae held a veritable monopoly over the secondary mortgage market. In , due to fiscal pressures created by the Vietnam War, Lyndon B.

Johnson privatized Fannie Mae in order to remove it from the national budget. At this point, Fannie Mae began operating as a GSE, generating profits for stock holders while enjoying the benefits of exemption from taxation and oversight as well as implied government backing. In order to prevent any further monopolization of the market, a second GSE known as Freddie Mac was created in Currently, Fannie Mae and Freddie Mac control about 90 percent of the nation's secondary mortgage market.

GSEs such as Fannie Mae and Freddie Mae, with their combination of private enterprise and public backing have experienced a period of unprecedented financial growth over the past few decades. The current assets of these two companies combine for a total that is 45 percent greater than that of the nation's largest bank.

On the other hand, their combined debt is equal to 46 percent of the current national debt. It is this combination of rapid growth and over leveraging that has lead to the current concerns of Congress, the Justice Department and the SEC with regards to the financial practices of these GSEs.

Fannie Mae and Freddie Mac are the only two Fortune companies that are not required to inform the public about any financial difficulties that they may be having. In the event that there was some sort of financial collapse within either of these companies, U. A recent investigation by the Justice Department and the SEC into the accounting practices at Freddie Mac revealed accounting errors in the amount of 4. Ongoing investigations by Congress, particular the House Finance Services subcommittee that oversees the activity of GSEs, will determine the future role of Fannie Mae and Freddie Mac and the secondary mortgage market that they dominate.

Currently our economy is a mixture of capitalism, socialism and fascism.

Fannie Mae and Freddie Mac regulator discussing plan to end conservatorship - MarketWatch

If you know the definition of each I need not explain What is needed is a thorough separation of business and state similiar to the separation of church and state, i. Lobbies would be non-existent because there would be no special favors such as Senator Dodd's kickback with Countrywide Mortgage. Combine this separation with the elimination of the IRS replaced with a federal sales tax and the American economy would explode.

The pass through was never implicitly guaranteed by Fannie or Freddie, only on Ginnie Mae pools.

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Without this bailout, the pass through may never have happened. If it were not for the fact that the majority of these securities were held by foreign governments, the dividends that were guaranteed by H. ACORN's involvement did not force institutions to create subprime product.

Nor did it lead to the creation of tranches. ACORN's involvement came because of bank and thrift institutions inability to lend in poorer areas even when some of the people qualified.

Why Shares of Fannie Mae and Freddie Mac Jumped on Tuesday

You will note that subprime product was used on a great many people who qualified for A paper product, which was the next big headline before the meltdown. Why did you need more regulation when all of the laws necessary to govern this product lay with the securities agencies whose job it was to rate the product? You could add all of the regulation in the world, but if people do not do their job, nothing will get accomplished. ACORN is not filled with angels or saints, but blaming this event on a non-profit whose total contribution to loans as a whole are less than a percent, will allow this kind of debacle to take place again.

You can find blame with democrats and republicans, but legislation that was not passed, and non-profits suing banks are not what caused the current issues. The donations come primarily from individuals at the organization not lobbying sponsorship as a whole. You can speculate on what side of the political fence someone lands on, but nobody is clean here, and there are no easy answers. If you own a home and got a decent rate anytime since , it was due to securitization. The pressure to purchase, not originate sub-prime product was what brought the demise.

As well as lack of oversight on the division of subprime product into tranches included into "good loan product". If the oversight would have been done properly, we would never be in this mess at the real estate mortgage level. Watch it continue as the same process was allowed on commercial product as well.