Do You Know Your Fannie from Your Freddie?

Fannie Mae and Freddie Mac are Government Sponsored Enterprises (GSE) in the home mortgage business.  They have the exact same business model, and they do the exact same thing.  That is, they buy mortgages on the secondary market, pool them, and then sell them as mortgage-backed securities to investors on the open market.  Everything else regarding government guarantees, explicit guarantees, implicit guarantees, subsidies and direct government funding is exactly the same for Freddie Mac as it is for Fannie Mae.

The main difference between Freddie Mac and Fannie Mae is that Fannie Mae primarily buys mortgages issued by banks and Freddie Mac primarily buys mortgages issued by thrifts (savings and loans).

The Associated Press (AP) reported today that Freddie Mac has requested $6 billion in additional aid after posting a wider loss in the third quarter.  Freddie Mac said that it lost $6 billion in the July-September quarter.  That compares with a loss of $4.1 billion in the same quarter of 2010.

The government rescued Freddie Mac and sibling Fannie Mae in September 2008 after massive losses on risky mortgages threatened to topple them.  Since then, a federal regulator has controlled their financial decisions.  (We can all see what good that has done!)

Taxpayers have spent about $169 billion to rescue Fannie and Freddie, which is the most expensive bailout of the 2008 financial crisis.  The government estimates it will cost at least $51 billion more to support the companies through 2014, and maybe as much as $142 billion in the most extreme case.

Fannie and Freddie own or guarantee about 50% of all U.S. mortgages, or nearly 31 million home loans worth more than $5 trillion.  Along with other federal agencies, they backed nearly 90 percent of new mortgages over the past year.

As mentioned previously, Fannie and Freddie buy home loans from banks and other lenders, package them into bonds with a guarantee against default, and then sell them to investors around the world.  When property values drop, homeowners default, because they are unable to afford the payments or because they owe more than the property is worth.  Because of the guarantees, Fannie and Freddie must pay for the losses.  (That would of course be you, acting as the American taxpayer.)

Fannie and Freddie are required to pay 10% dividends on the government money they receive.  Freddie paid $1.6 billion in dividends to the U.S. Treasury Department in the July-September quarter.