Fannie and Freddie going into receivership

[adciv]

Fannie Mae and Freddie Mac are going into receivership with the Federal Government. Translation: The Federal Government is essentially declaring them bankrupt and is taking them over to keep them running. SF Gate

Part of their problem has been their inability to borrow money, something they need to do regularly to maintain operations as they have for the past 70 years. I've been reading mixed reports as to whether they have enough money to maintain operations without going into receivership. The write downs I've come across are small compared to their total mortgage holdings. However, it is still significant. Both posted about $2 billion in losses for FY 2007.

Fannie and Freddie were both founded in 1938 as part of the New Deal. They were designed to maintain liquidity in the home and loan markets. In 1968, they were spun off into private corporations. Between the two of them, they have $5.3 trillion (10^12) in mortgages, a significant portion of the mortgage markets. Note that this does not mean a 50% increase in the national debt, as this would include the assets of Fannie and Freddie coming under government control, not just the liabilities. Freddie Mac has a net worth of negative $5.6 billion. Fannie Mae has a net worth of positive $12.5 billion. Alternatively, using another accounting method, their combined net worth is negative $50 billion. source As I understand it (sorry, forgot the article link) Fannie and Freddie have weathered troubles before without going into receivership, such as in the 80's. However, this time appears to be different.

A saying I heard a few years ago, slightly updated for the times. "If you owe the bank a billion dollars, the bank is in trouble. If you owe the bank a trillion dollars, the banking system is in trouble."

[ampersand]

This is bad. Very bad.

[adciv]

Lucksi, you're talking about three different things.

1) What Fannie and Freddie do
2) The selling of mortgages
3) Seizure of land of the mortgage


1) Fannie and Freddie buy and insure mortgages and loans[1]. They buy loans from a lender and then receive the loan payments from the person who received the loan. This is done to free up money to allow the bank to make more loans. This was started in 1938 to help people purchase houses and such. Part of the cause of the Great Depression in the US was the lack of money being able to be loaned out. Fannie and Freddie were founded to assist this. The second thing they do is insure loans. That means that, for a fee each year based on the specifics of the loan, Fannie and Freddie will pay back the loan themselves if it is defaulted on. In other words, they are acting as an insurance company in case the loan turns bad. This makes banks more likely to give out loans as it lowers their risk.

2) The selling of mortgages and other loans is quite common in the US. Basically, it is no different from selling bonds. The loan is sold for a dollar amount and the new owner gets the payments.

3) Seizure of the land and termination of the mortgage is, to my knowledge, not allowed. The person making the payments must be behind on payments by a certain amount or have gone into default or something (this is called foreclosure). Usually, the holder of the loan does not want to foreclose on the house, as they would then have to sell the house to get any money back. They would rather just get the payments on the loan. Further, in the US, if the outstanding amount of the loan in $X and the house sells for $Y and Y>X, then whoever foreclosed on the house must pay the defaulter $(Y-X). I'm quite interested as to why it is so easy to seize the land in Germany.

[1]I shall now only use 'loans' to refer to both to save space/time.

[collegestudent22]

Government to the rescue

And this is why things like this occur. Why worry about risk when you know the government will bail you out? The only losers here are the top executives and the American people. Sad.