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Mr. Alford is a student at the University of Washington and an HNN intern.
In recent months, the nation's two largest mortgage finance lenders have come under increasing scrutiny at the hands of Congress, the Justice Department and the Securities and Exchange Commission (SEC). The Federal National Mortgage Association, nicknamed Fannie Mae, and the Federal Home Mortgage Corporation, nicknamed Freddie Mac, have operated since 1968 as government sponsored enterprises (GSEs). This means that, although the two companies are privately owned and operated by shareholders, they are protected financially by the support of the Federal Government. These government protections include access to a line of credit through the U.S. Treasury, exemption from state and local income taxes and exemption from SEC oversight. A recent accounting scandal at Freddie Mac that resulted in the replacement of three of the company's top executives has led to mounting concerns over the privileged status these GSEs enjoy in the marketplace.
Fannie Mae was created in 1938 as part of Franklin Delano Roosevelt's New Deal. The collapse of the national housing market in the wake of the Great Depression discouraged private lenders from investing in home loans. Fannie Mae was established in order to provide local banks with federal money to finance home mortgages in an attempt to raise levels of home ownership and the availability of affordable housing.
Initially, Fannie Mae operated like a national savings and loan, allowing local banks to charge low interest rates on mortgages for the benefit of the home buyer. This lead to the development of what is now known as the secondary mortgage market. Within the secondary mortgage market, companies such as Fannie Mae are able to borrow money from foreign investors at low interest rates because of the financial support that they receive from the U.S. Government. It is this ability to borrow at low rates that allows Fannie Mae to provide fixed interest rate mortgages with low down payments to home buyers. Fannie Mae makes a profit from the difference between the interest rates homeowners pay and foreign lenders charge.
For the first thirty years following its inception, Fannie Mae held a veritable monopoly over the secondary mortgage market. In 1968, due to fiscal pressures created by the Vietnam War, Lyndon B. Johnson privatized Fannie Mae in order to remove it from the national budget. At this point, Fannie Mae began operating as a GSE, generating profits for stock holders while enjoying the benefits of exemption from taxation and oversight as well as implied government backing. In order to prevent any further monopolization of the market, a second GSE known as Freddie Mac was created in 1970. Currently, Fannie Mae and Freddie Mac control about 90 percent of the nation's secondary mortgage market.
GSEs such as Fannie Mae and Freddie Mae, with their combination of private enterprise and public backing have experienced a period of unprecedented financial growth over the past few decades. The current assets of these two companies combine for a total that is 45 percent greater than that of the nation's largest bank.
On the other hand, their combined debt is equal to 46 percent of the current national debt. It is this combination of rapid growth and over leveraging that has lead to the current concerns of Congress, the Justice Department and the SEC with regards to the financial practices of these GSEs.
Fannie Mae and Freddie Mac are the only two Fortune 500 companies that are not required to inform the public about any financial difficulties that they may be having. In the event that there was some sort of financial collapse within either of these companies, U.S. taxpayers could be held responsible for hundreds of billions of dollars in outstanding debts. A recent investigation by the Justice Department and the SEC into the accounting practices at Freddie Mac revealed accounting errors in the amount of 4.5 to 4.7 billion dollars and resulted in the termination of three of the company's top executives. Ongoing investigations by Congress, particular the House Finance Services subcommittee that oversees the activity of GSEs, will determine the future role of Fannie Mae and Freddie Mac and the secondary mortgage market that they dominate
Social Security is not failing. More privatization bullshit.
If we raise the upper income limit to over 95,000, it can be solvent forever.
Wow, we may have to pay more today than yesterday. Now that doesn't happen for any other frigging service or commodity does it?
Let's privatize it so that more greedy bastards can try and milk it dry to make millions just like has happened to the current economic crap.
Dems didn't own Freddie and Fannie. They were privately owned. More proof that some institutions that can have such a large negative impact upon our country should be government run.
How many on these threads have seen their 401 go south with this sound and healthy economy of Bush/McCain?
They workd okay for the first 30 years run by the government. This privatization crap is not all it cracks up to be all the time.
What Are the Origins of Freddie Mac and Fannie Mae?.
And it is the most popular and effective social program in America. And you know why? Because it is good thing for all, especially those whose spouses die or whose business goes under due to economic downturns. Now we need the democrats to create a UHC system that works for all and we will have even a better nation.
Sweet! I hope he does... Maybe I will get more than $400 a month to live on when I retire....if social security is still around that is...
That's good news for everyone.... get the government out of the way and let people prosper!!!!!!
rayboy - You know nothing about 401k's do you... When you are close to retiring you pull your money out of the stock market move your money to something safer... Besides, where in the constitution does it say the American people have the right to a retirement plan?
They were created to help during the depression, they did mostly good work. The housing bubble was caused by greed and stupidity, it is why we need a strong regulatory system. Fan and Fred suffered from the very casino mentality that creates all bubbles. It is why SS needs to be kept far away from the investors. The ramifications of free market ideology, get rich quick schemes, and simple poor decision making is why they needed a bailout - not their structure or their purpose.
Krugman: Fannie and Freddie - International Herald Tribune
They workd okay for the first 30 years run by the government. This privatization crap is not all it cracks up to be all the time.
What Are the Origins of Freddie Mac and Fannie Mae?.
Citizens should at least be given the choice to opt-out of Social Security if they so desire.
Amen-----this is a prime example of why I dont want someone else fucking around withmy mnoey.
rayboy - Sorry to get so upset, but I just don't agree with the philosophy that the government knows how to spend my money better than I do...
Answer: they should be allowed to fail. Propping them up will just make the inevitable that much worse. Best to correct course as early as possible.
This is all about creating more and more government.
never, because it isnt true
they were created by an act of congress
how many times do you need to be told this before it sinks into that thick skull?
Of course that is all the Dems know how to do. It is their answer to everything. Throw money at it, and create new Government programs.
Get used to it if Obama wins and the Dems maintain control of Both houses of Congress, because by the time they are done this country will closely resemble Russia in say the 1920's.
Exactly allow them to fail, then some other company will step in pick up the pieces and make some money doing it.
capitalism in Action. The way the system is suppose to work.
This is all about creating more and more government.
