It is no doubt that Fannie Mae and Freddie Mac are the backbone to the success of the US mortgage industry. So how is it that these two mortgage giants came to a position where the government is stepping in to make certain that they do not fail?
Fannie Mae, created in 1938, and Freddie Mac, founded in 1970, buy mortgages from lenders and package them into securities that are sold to investors. This frees lenders to provide new mortgages, making it easier for more Americans to buy homes. The entities hold or guarantee $5.3 trillion in mortgages, about half the country's total, and guarantee principal and interest on the mortgage-backed securities.
Problems with Fannie and Freddie really began to surface when they posted their earnings for 2007 when both mortgage giants lost billions of dollars, proving that the mortgage crisis was poised to impact all types of mortgage lenders.
Even after the loss of billions of dollars, restrictions limiting the number of loans that Fannie and Freddie could purchase were lifted. Restrictions were imposed on the two mortgage giants for accounting scandals that happened within the two companies during the height of the mortgage boom.
Within two weeks of Fannie and Freddie having the capabilities to purchase more mortgage loans, the government made $200 billion available to the two companies to increase their purchasing power.
The latest actions by the government include making money available to Fannie and Freddie from the Federal Reserve Bank of New York should it become necessary.
However, Richard F. Syron, Chairman and CEO of Freddie Mac claims that Freddie is financially stable, stating “We are in the process of finalizing our June 30, 2008 results and we estimate that they will show we have a substantial capital cushion above the 20% mandatory target surplus established by our regulator. We expect the results will also show that we have a much greater surplus above the statutory minimum capital requirement. The company's capital and liquidity resources will enable it to continue to serve its public mission as it has always done.”
Fannie Mae also claims to be a strong financial position. ” We continue to hold more than adequate capital reserves and maintain access to liquidity from the capital markets. Given the market turmoil, having options to access provisional sources of liquidity if needed will help to strengthen overall confidence in the market. We will continue to do our part to provide liquidity, stability and affordability to the housing market now and in the future,” states Daniel H. Mudd, President and CEO of Fannie Mae.
Fannie and Freddie may have adequate reserves to weather the storm for the time being. There is speculation however that this mortgage crisis will last beyond 2010 which could make it difficult for the two mortgage giants to continue to take losses without the government stepping in to help replenish Fannie and Freddie’s reserves.
Keep updated with the latest mortgage headlines by visiting Future Planning Financial at www.fpf-direct.com.
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