NPR logo Ms. Mae and Mr. Mac

Ms. Mae and Mr. Mac

Why should you care about the fiscal health of Freddie Mac and Fannie Mae?

Even after Treasury Secretary Henry Paulson's announcement last night that the federal government is here to help, I still wasn't sure why, exactly, I should care. Well, these two "quasi-governmental" organizations were created by Congress to help make it easier to get home loans. They now back or insure more than five trillion dollars in mortgages. The mortgages are often bundled in mortgage-backed securities, which are sold on Wall Street. These securities are guaranteed — if a homeowner defaults on a loan, the Mac or the Mae pays it, and the investor doesn't suffer. But now, with foreclosures surging, they face the possibility of having to pay out more than they have in reserves.

So, IF Frannie&Freddie went under, it could cripple the credit markets and wreak havoc on the housing market, in which few would ever be able to get a home loan. So... If need be, the government will step in. Do you care yet? Here's another reason: This is a weird situation — if the securities are doing well, making money, investors receive dividends... but if they aren't, taxpayers make up the difference in the form of the government bailout. Huh? Exactly.

Leave your questions for our panel of Mac-n-Mae experts here.



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I am beyond angry that my tax dollars are being utilized to correct other people's bad decisions. I knew it would happen, but it is still unforgivable. Let's sell some of the brokers' mansions to make up the money!!!!

Sent by Lynn | 2:14 PM | 7-14-2008

You need to make it clear that the total outstanding loans equal $5 Trillion. Just because that is outstanding does not mean every single mortgage that makes up that total is going to default. Stop adding to the hysteria.

Sent by David Roberts | 2:17 PM | 7-14-2008

With housing prices dropping 10-30% aren't all mortgage banks technically bankrupt since the typical mortage is 20% down? With Fanny and Freddy mortgages typically 5%?

Sent by Ralph Lanni | 2:18 PM | 7-14-2008

How exactly does the Government "back" Fredy Mac & Fanny Mae?

Whose budget does that money come from and will the Government have to borrow more money from China (or somewhere else) in order to pay for it?

Sent by Brad Freese | 2:22 PM | 7-14-2008

While it is clear that Fannie Mae and Freddie Mac's dropping stock prices and liquidity issues are certainly concerning, to say that if the companies fail, the economy would suffer a loss of 5 trillion dollars is absurd. Yes, the real estate market in many markets around the country have seen values decline, the reality is the bulk of the country is seeing stable market values. Most of the mortgages in Freddie Mac and Fannie Mae's portfolios are not going to default. This is yet another example of how irresponsible media create false crisis so that the incessant talking heads of the 24 hour news cycle have something to discuss.

When the housing industry was booming, everyone applauded the American system which has provided homeownership opportunities to millions of Americans. Homeownership for most Americans is the single greatest source of wealth. It may be several years before the issues in the real estate market work themselves out, our housing market will rebound.

Sent by Adam Hall | 2:22 PM | 7-14-2008

I thought that the real problem here was created by those lending institutions that made "sub-prime" loans. My understanding is that Freddie and Fannie don't and can't buy sub-prime loans. Isn't the problem for Freddie and Fannie really the declining housing price market, which was more created by the sub-prime problems, than something Freddie and Fannie did?

Sent by Lawrence Stephenson | 2:26 PM | 7-14-2008

When these programs are formed, why don't we set them up as COOPs rather than for profit organizations. That way they serve us ,the consumer, rather than executive salaries and shareholder profits.

Sent by Doug | 2:26 PM | 7-14-2008

What other efforts can the government make to stimulate the real estate market? Would the Fed lower interest rates? What about inflation?

Sent by Earl Nissen | 2:30 PM | 7-14-2008

Anyone who thinks that Fannie Mae and Freddie Mac should be left to the wolves of the market makes about as much sense as Andrew Mellon did in 1930 saying "liquidate, liquidate, liquidate."

First off, Fannie Mae and Freddie Mac are regulation success stories. In exchange for an implicit government guarrantee for their debt they have to obey stricter lending standards (i.e "subprime" is by definition below what Fannie Mae and Freddie Mac can underwrite).

Thus Fannie Mae and Freddie Mac have weathered the housing crisis much better than the 200+ other lenders that have gone under.

So, if Fannie Mae and Freddie Mac didn't make subprime loans, why are they in trouble? Because prices for all homes are falling, not just ones with subprime mortgages. This plus the recession is causing an uptick in bad loans even for Freddie Mac and Fannie Mae, so they need more capital to write off the bad loans. And they don't have they money (which can be blamed on lax regulations, not over-regulation).

But saying that the market will solve everything is foolhardy nonsense. Without the GSE's home lending would cease, and we'd be straight back in the Depresssion era conditions which led to the creation of Fannie Mae and Freddie Mac in the first place.

Sent by Charles Redditt | 2:33 PM | 7-14-2008

We currently hold an Option ARM on a piece of rental property. We did this knowingly. Many years ago, when we attempted to sell the house due to a required employment move, the bank refused to even talk to us about anything but "make the payments". We did so for years, absorbing losses when the rent did not meet the payments. When presented with a means to recover equity that had rebuilt over the years (the home lost over 50% of its equity in the mid 1980's), we took the loan. We will deal with the loan recast when it happens.

Secondly, if we had rented our primary residence for the last two and a half decades, we would have been penalized on our taxes (we would not have been able to itemize our deductions, etc.) Until the entire scheme of tax, real estate, and related laws and regulations are re-balanced to allow people to rent without being penalized, the housing industry will continue to be a powerful force on Capitol Hill.

Sent by Peter | 2:35 PM | 7-14-2008

How is this different from the Savings and Loan debacle of the late '80s???? This is breaking the backs of the average tax payers, once AGAIN!!

Sent by Tess Halliday | 2:38 PM | 7-14-2008

Thanks to you and your guests for covering this difficult topic, but there is one thing that I think merits consideration: That is, if there is value to either Fannie or Freddie, where are the Warren Buffets or Sovereign Wealth Funds as they were with other interventions this past year?

Sent by frank hodgetts | 2:39 PM | 7-14-2008

The discussion of FNMA and FHMC included the question from Gretchen that, "We don't know how much subprime they have." According to Paul Krugman in today's NY Times, "Also, they didn't do any subprime lending, because they can't: the definition of a subprime loan is precisely a loan that doesn't meet the requirement, imposed by law, that Tannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income."
Let's not lose our prospective entirely and panic needlessly. Let's get our facts straight.

Sent by Roger E. Malman | 2:41 PM | 7-14-2008

Let them crash, and let the rest of it burn with them. Better than slow decay, let us instead pay for our mistakes and greed. It is inconceivable that an institution that is incapable of managing the money it already has be allowed to continue, even at the cost of those who were to foolish to buy only what they could afford. They deserve no better. What this means is that no matter what investment I take, whether fair or or poor, I will be granted the security of always seeing a profit from it? The imbecility of others is none of my business. Period.

Sent by Ares Logan | 2:49 PM | 7-14-2008

I think that the run up in home prices in the U.S. and other stable housing markets was driven by a need by investors around the world to park money where they could see a return on investment more favorable than bond markets.The banks devised very questionable mortgages to generate a vehicle for these investors who are global(see trillions in cash that chinese investors and others held)The banks made money every time a mortgage was written.They were greedy,the appraisers and underwriters and politicians and regulators were well paid.The housing market collapsed,our houses are overvalued and the government is acting to rescue investor capital in a market which is resisting valuation or transparency.I would like to see government act to remove the housing stock from being a vehicle for profit from global investors.I would like to see transparency in the lending process on paperwork.I would like to see the government to realign itself to be a voice for the average american and become relevant again to the individual.

Sent by maureen reilly meagher | 2:55 PM | 7-14-2008

I have to take issue with Adam Hall's comments. To anyone that has followed the Fannie Mae story (the Wall Street Journal editorial page today has a link to all of its pieces on Mae/Mac over the past six years) for a while, this recent media coverage is a bit interesting, to say the least. The danger signs of their practice of trying to imply that their loans were backed by the federal government (when they were clearly not) have been present for 6 years or more. Rep Chuck Schumer has made the backing of Mae/Mac his personal mission. I am certainly not implying he is on the take, but it is well known that the home builders association and Mae/Mac donate rather freely to both parties campaigns. Today's guest on Talk of the Nation was certainly trying to downplay the enormity of the 5 Trillion dollars worth of debt that Mae/Mac holds. To say that "well, it is only a problem if everyone sells their house right now. If people waited and sold their house a few years from now, when the housing market has rebounded..." I think the guest is completely out of touch with what this represents. How can you possibly downplay the importance of 1/3 of our GDP? The stock price tumble of Mae/Mac is what it is. It is a measure of how its investors value Mae/Mac. The market has spoken. Now we get to watch as the politicians scramble to cover their bacon. The end result will be that the higher income taxpayers will fund this debacle. Their past implication will be today's reality-Mae/Mac will be federally backed. Wow. I wish I ran a company that I could reap the profits and get bailed out when there is a correction. My hats are off to the chiefs at Mae/Mac. What a masterstroke. It'll be interesting to hear what Schumer will be saying now. I bet the silence will be deafening.

Sent by Mark Davidian | 2:56 PM | 7-14-2008

One of your speakers mentioned that money market funds are invested heavily in Fannie Mae and Freddie Mac. Since the stock market is not considered safe, many investors moved their money to money market funds assuming that this is fairly safe.

My questions are -- do I risk losing my money market investment as result of what is going on right now? , are institutions like vanguard facing potential problems as well?

Sent by Arie Maayan | 3:03 PM | 7-14-2008

The increase in interest rates and subsequent decline in housing prices that will occur if we allow these agencies to fail will affect everyone, not just homeowners or employees at the agencies. Our national economy is consumer-driven. Many consumers have been funding their spending with 2nd mortgages based on accrued equity as their home appreciated. If that equity continues to fall--or falls more dramatically--consumer spending will fall through the floor. Then economy will truly be in trouble--moreso than 0% growth state we are all currently bemoaning.

It appears to me that those who think letting the agencies crash will primarily hurt sub-prime mortgage writers are not aware of this. We are all in this together. These agencies are too important to our current economic structure to let fail.

Sent by Chris Kretler | 10:04 PM | 7-14-2008

I haven't heard any discussion, or read any news report, about what is happening to all those PMI premiums. Private Mortgage Insurance is paid by the borrower to insure the lender in case of default. What's happening to all that money and why have I been paying it for almost 10 years?

Sent by Leanne | 3:00 PM | 7-15-2008

It is unethical for the Treasury and Paulson to bail out Fannie and Freddie when they are owned by stockholders who invested hoping to profit...they took a risk like all stockholders and if they lose, they lose. Is the Treasury going to bail out GM, the airlines, etc. at the expense of the taxpayers...let the companies correct themselves and not at the taxpayers expense...

Sent by Stella | 4:00 PM | 7-22-2008

Having read numerous articles on the losses suffered by FNMA and FHLMC, I have not seen an analysis for the reasons for the losses. The decline of property values is only one of the elements. FNMA and FHLMC's automated underwriting systems utilized by the lenders that sell to FNMA and FHLMC are a huge part of the problem. The underwriting of the loans is rarely done by experienced underwriters. The goal since underwriting departments are in 'production' departments is quantity not quality. With the drive for production and the use of inexperienced staff, it opens the door for the mortgage fraudsters that ravaged the sub-prime market. If the prime mortgage world thinks they are insulated from fraud - think again. Mortgage fraud is a cash-cow for professional fraudsters who know the system.

Sent by Judie | 8:58 AM | 8-7-2008