Fannie and Freddie

Fannie and Freddie:

According to the New York Times, on Friday March 5, 2010 Rep. Barney Frank of Massachusetts noted in a speech to the press that debt issued by Fannie Mae and Freddie Mac is different from bonds issued by the Treasury Department. This worried investors who believe debt issued by Fannie and Freddie is backed by the United States government since the government has taken over the two companies. Since the statement has been made the U.S. treasury department has been forced to reiterate its support in Fannie and Freddie. Fannie Mae and Freddie Mac are two mortgage finance companies that together own or guarantee around half of the mortgages in the United States.

Since September 2008 the two mortgage finance companies were taken over by the U.S. government. The two mortgage giants control a considerable portion of the U.S. mortgage market, mortgages and the homes that they are backed by are considered the principal sources of wealth for many Americans. Since the takeover of Fannie and Freddie investors have been able to purchase these mortgages assuming that if the homeowners default they will be compensated by the federal government. This raises the value of these mortgages and lowers the risk associated with them. When a representative from the government states that these loans are not the same as treasuries investors become less willing to take on the risk of the mortgages and therefore ask for a higher return on their investments. This could cause mortgage interest rates to rise and ultimately depress the housing market.

Through this reaction we can trace how the United States government is in effect propping up housing prices. The government has taken over Fannie and Freddie and has guaranteed the mortgages owned by the two companies. Since half of the market is controlled by Fannie and Freddie half of the mortgages in the U.S. are very safe investments and have low interest rates. This drives up the demand and thus the price of homes. The federal government has sunk 127$ billion into the two companies and has acknowledged its backing of the 6-7$ Trillion of assets and debt held by Fannie and Freddie.