Today’s subject is complicated, if not boring. Because my mailbox has been inundated with questions regarding the Fannie Mae and Freddie Mac debacle, I will address the subject as I understand it in the simplest of terms.
There are four players:
1. Fannie Mae (Federal National Mortgage Association or FNMA)
2. Freddie Mac (Federal Home Loan Mortgage Corp. or FHLMC )
3. U.S. federal government
4. U.S. taxpayers
Fannie Mae was created in 1938 by President Franklin Roosevelt to make it possible for more Americans to buy homes. Banks could lend money to individuals and then sell those loans to Fannie Mae. By selling loans to Fannie Mae, banks were “repaid” immediately so they could lend money to other people.
Once Fannie Mae bought these loans, it would turn around and sell the mortgages on the open market to investors as mortgage-based securities. That gave Fannie Mae money to buy more mortgages from local banks and mortgage lenders, and the cycle could repeat itself.
By 1968, Fannie Mae had grown tremendously and was converted from a government agency to a private corporation to remove it from the federal budget.
Freddie Mac was created in 1970 to do the same thing as Fannie Mae, which increased the supply of money available for mortgages in the United States.
Fannie Mae and Freddie Mac technically remained private corporations for the next 38 years. Both are shareholder-owned, but they always have been controlled by the government as