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Investor concerns about the financial health of Fannie Mae and Freddie Mac, the two big government-chartered mortgage corporations, have pushed the federal government into action.
But what these companies are, and their roles in the mortgage world, may be a mystery to many people.
Fannie Mae and Freddie Mac together hold or insure more than $5 trillion in U.S. home mortgages - about half of all U.S. mortgages. For months, they have seen their stock prices skidding toward a cliff. Fears about the housing crisis have made investors around the world worried that Fannie and Freddie could go broke.
So what?
Fannie Mae and Freddie Mac buy mortgages issued by banks and other lenders. If Fannie and Freddie are in trouble, it becomes harder and harder to get a mortgage or refinance. More broadly, the failure of the institutions would be dead weight on an already staggered global economy.
People making on-time payments on existing mortgages have no cause for immediate worry. But anyone behind on payments and hoping to renegotiate a home loan, or those waiting for a mortgage approval, could face new delays, or even rejections. Lenders already are reporting some delays and tightening lending standards.
Meanwhile, Congress and the White House are working on fixing Fannie and Freddie's problems. On Sunday, President Bush and congressional leaders pledged to support the struggling companies. The Treasury Department presented a plan to help provide Fannie and Freddie with huge new borrowing capacity. The Treasury also said it would ask Congress for authority to invest in the companies - taking partial ownership in exchange for big cash infusions.
Separately, the Federal Reserve said it would open a special lending option to Fannie and Freddie to provide added support.
The moves are meant to rekindle investor confidence in the nation's two largest purchasers of mortgage debt.
They already may be working.
Yesterday, Freddie Mac auctioned off $3 billion in short-term securities. There had been worries that no one would show up for the sale. Instead, it drew more bidders than such auctions have in months. Investors may be thinking Freddie will stick around and have the money to pay its debts.
The name Fannie Mae is short for Federal National Mortgage Association, chartered in 1938, and Freddie Mac is the Federal Home Loan Mortgage Corp., chartered in 1970. Both are so-called government-sponsored enterprises, or GSEs. But they are not government owned, and their shares trade on the New York Stock Exchange.
Here's what they do:
When you obtain a mortgage from a commercial bank or other lender, that loan becomes part of the bank's assets or is sold to a third party - such as Fannie or Freddie. In turn, Fannie and Freddie either hold the mortgages or bundle them into securities that are sold to investors.
Proceeds from the securities' sales are used to buy more mortgages from lenders. Whether they keep them or sell them, Fannie and Freddie insure the mortgages.
By providing and guaranteeing a seemingly bottomless source of money, the two institutions have opened homeownership to millions of Americans. That said, both corporations own or insure mainly traditional and safer prime mortgages rather than the exotic loans that have gotten many lenders in trouble over the last year.
Nevertheless, things have gone wrong for Fannie and Freddie as the housing market has darkened.
In many areas of the country - California, the Southwest, Florida, and some Midwestern states - home values have deflated and foreclosures have risen to unprecedented levels. That has increased the losses on the mortgages Fannie and Freddie hold. Federal rules require that Fannie and Freddie keep a certain amount of money as a cushion against losses. The fear is that they might not be able to get their hands on enough money to maintain that cushion.
For consumers, there likely will be delays in mortgage approval as Fannie and Freddie tighten the standards they require loans to meet before they will buy them. Would-be borrowers already sweating out a settlement may be asked for more documentation and renegotiation of interest rates.
Borrowers with impeccable credit, and who are able to make a down payment of 20 percent or more, are unlikely to be affected.
But anyone with less than stellar credit and limited financial resources will find limited mortgage sources and low borrowing limits.
Alternative loan sources are available. For example, FHA- or VA-insured loans are available from lenders approved by the federal Department of Housing and Urban Development and are thus government-guaranteed.
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