I taught an RTNDF news decision-making workshop in Columbus, Ohio, over the weekend. As part of the workshop, I led a focus group discussion with a couple of dozen citizens. I was taken by how strongly these everyday folks stated that they want more information about the
Fannie Mae and
Freddie Mac story. Investors are worried that the companies don't have enough money to pay for their losses on bad home loans. Fannie Mae's stock
closed Friday at $10.25. It has traded as high as $70.57 in the last year.
They spoke, unprompted by me, about how these two companies own half of the mortgages in the country right now. They mentioned it over and over as a big story that is being covered by the networks but ignored by local stations, and they said they want to see more reporting by newspapers and radio, too.
Sunday evening,
the Federal Reserve Board and the Treasury Department said they would have plenty of money to loan Fannie Mae and Freddie Mac if needed.
The announcement clearly was timed to settle Wall Street nerves before the markets open, and it came just before the Asian markets opened for Monday trading.
Here's
Fannie Mae's reaction and
media contacts. And here's how
how Freddie Mac responded, its
media page and
media fact book.
It was a frantic weekend.
The Washington Post reported:
"Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies," Treasury Secretary Henry M. Paulson Jr. said in a statement he read before television cameras last night. ...
Government leaders opted not to inject new money into the firms directly and stopped far short of nationalizing them. Officials continue to state that the companies are financially sound and should be able to continue funding Americans' home mortgages.
What are Fannie Mae and Freddie Mac and what do they do?
These two publicly traded companies have a vital role in home mortgages. They do not loan directly to homebuyers, but they buy loans from banks on what is called the "secondary" market. (While they are public companies, traded on the stock exchange, they are, in a way, a hybrid because they are backed by the U.S. government.)
There are two kinds of lenders generally, primary lenders and secondary lenders. Your bank or savings and loan, for example, is a primary lender. Fannie Mae, Freddie Mac and other secondary lenders buy mortgages from those originating lenders. The primary lenders take the money and generate more loans. The banks don't really want to hold the mortgages as an investment. They want to keep generating loans. These big secondary mortgage companies also steady shaky housing markets around the country.
Here is how Freddie Mac describes the process [Flash]:
- Borrower applies for loan.
- Lender evaluates application, often using Freddie Mac tools, and makes loan to the borrower.
- Lender sells loan to Freddie Mac. Freddie Mac pays lender, providing funds to make new loans to other borrowers.
- Freddie Mac packages loans into mortgage-backed securities, then sells them to investors.
Freddie Mac says it has [PDF]:
- Financed housing for more than 50 million families -- 1 in 6 homebuyers and more than 4 million renters
- Financed nearly 3.3 million homes in 2007 alone
- Helped more than 360,000 first-time homebuyers buy a home in 2007
The company said more than half of its mortgage purchases finance homes for low- and moderate-income borrowers, with an average loan of $185,000.
See how much Freddie Mac is involved in projects in your state. I think you will be surprised by how large the footprint is.
What is Fannie Mae? Its website says:
Fannie Mae was created in 1938, under President Franklin D. Roosevelt, at a time when millions of families could not become homeowners, or risked losing their homes, for lack of a consistent supply of mortgage funds across America.
The government established Fannie Mae in order to expand the flow of mortgage funds in all communities, at all times, under all economic conditions, and to help lower the costs to buy a home.
In 1968, Fannie Mae was re-chartered by Congress as a shareholder-owned company, funded solely with private capital raised from investors on Wall Street and around the world.
You can click here to see Fannie Mae-owned homes for sale around the country.
How did these companies get their silly-sounding names?
Fannie Mae's actual name is the Federal National Mortgage Association. When you shorten it to FNMA, it sounds like "Fannie Mae."
Freddie Mac's name was a little less obvious. The real name of the company is the Federal Home Loan Mortgage Corp.
Who oversees these two companies?
Both the current and former Fed chairmen have called on Congress to increase oversight on companies like Freddie Mac and Fannie Mae. Congress may get involved very quickly in this matter.
Missing from the discussion is the reason lenders are in...
