Freddie, Fannie Troubles Continue
MELISSA BLOCK, host:
And again, there are indications today that the Federal Reserve is prepared to throw a lifeline to Fannie Mae and Freddie Mac. As we mentioned, a report from Reuters News Service suggests the two companies would be allowed to get emergency loans at the Fed's discount window.
Fannie and Freddie are crucial players in the nation's mortgage market. They either own or guarantee $5.2 trillion in mortgages. That's equal to about half the value of all the mortgages in the United States. And NPR's John Ydstie joins us to talk about the companies and their problems. Hi, John.
JOHN YDSTIE: Hi, Melissa.
BLOCK: And first of all, what does this news of the potential aid from the Fed for Fannie Mae and Freddie Mac, what does it mean?
YDSTIE: Well, I think the report suggests that the Fed may be trying to calm the jitters over whether Fannie and Freddie might fail by allowing them to get these low-interest loans from the Fed's discount window. It's the same thing that the Fed did for Wall Street investment banks to calm the credit markets after the collapse of Bear Stearns.
BLOCK: And getting loans from the discount window, is that the same thing as a bailout?
YDSTIE: Well, I think this stuff could be called less than a bailout. Even though it puts some taxpayer money at risk, and despite all the panic in the financial markets over this, some analysts and government officials are still saying a bailout is unlikely. They say there's still time for Fannie and Freddie to get additional capital in the private markets.
In fact, yesterday the agency that regulates Fannie and Freddie said they still have adequate capital to operate, and Secretary of the Treasury Paulson agreed. Today he said they should remain in their current form as shareholder-owned companies, but I think it's safe to say in a situation like this things can change pretty rapidly.
BLOCK: Back us up a bit, John, to the long and complicated history of Fannie Mae and Freddie Mac. For those not in this world, it's really hard to figure out what these guys do.
YDSTIE: Well, they were created by the government to help make more money available for home loans. Fannie Mae was created back in the Depression in 1938, and then it was turned into a shareholder company in 1968. A couple years later Freddie Mac was created to provide some competition. And what they do is buy mortgage loans from banks and mortgage companies. They package them into investments called mortgage-backed securities, and then they sell them to investors, and that injects a lot of investment money into the mortgage pool. But here's the big thing. Freddie and Fannie guarantee all the loans they sell to investors.
So if a homeowner defaults on their mortgage, Fannie and Freddie will step in and make good on the loan, and as you said, they're guaranteeing trillions of dollars worth of loans, so if they failed it would be a huge mess.
BLOCK: And since we know what's been going on with the mortgage markets and the housing markets, we can extrapolate why Fannie Mae and Freddie Mac are in such trouble right now.
YDSTIE: Exactly. They're in trouble because homeowners are defaulting and being foreclosed on at alarming rates. So Fannie and Freddie are being forced to make good on those guarantees. Already they've posted $11 billion in losses, and investors are just worried more is to come.
BLOCK: And is that why investors are selling off the shares, why Fannie Mae and Freddie Mac have been tumbling so low?
YDSTIE: Well, that's one reason. Another is that earlier this week a former Federal Reserve governor said Fannie and Freddie were already insolvent, and he urged the government to take them over.
Of course, if the government takes them over, shareholders are likely get little or nothing, so investors have been scrambling to sell their shares, and the share price is now 80 percent below where it was a year ago.
Right now these companies are really fighting a psychological battle, trying to convince investors that things aren't really that bad when investors seem to be convinced things are only going to get worse, and of course that can become a self-fulfilling prophecy.
For financial firms, it's very hard to win back confidence once the market turns against you.
BLOCK: How many stakeholders, shareholders, are we talking about here?
YDSTIE: Well, there are a lot of stakeholders. These are very widely held stocks, and millions and millions of shareholders are obviously losing money, and that includes a lot of people with 401Ks and mutual funds who don't know they own these stocks.
But there's an even bigger issue. If investors lose faith in Fannie and Freddie guarantees and refuse to buy the mortgage-backed securities they package, it could freeze up the mortgage market and make it very difficult to buy or sell a house. That's one reason people have been urging the government to step in quickly.
BLOCK: And briefly, John, is it the case that the government backs these loans from Fannie Mae and Freddie Mac?
YDSTIE: Well, the law that created Fannie and Freddie says the government does not guarantee these loans, but I think we're finding out that the government does stand behind them.
We heard from many government officials what appears to be obviously - obvious, that they're too big and important to go under, and that strongly suggests the government guarantees them.
BLOCK: Okay, NPR's John Ydstie. Thanks so much.
YDSTIE: You're welcome.