farmdoc's blog post number 123

I have no direct knowledge of, or experience with, today’s topic: During the subprime crisis, two intriguing names keep bobbing up: The Federal National Mortgage Association [FNMA] (NYSE: FNM), is a US government sponsored enterprise [GSE]. Its name – Fannie Mae – comes from its acronym, and has been adopted officially for easy identification. Founded as a government agency in 1938, for the next 30 years it held a monopoly on the US secondary mortgage market in which it remains the largest institution even though it was privatised in 1968. The second largest is the Federal Home Loan Mortgage Corporation [FHLMC] (NYSE: FRE) whose name – Freddie Mac – also comes from its acronym, and has been adopted officially for easy identification. In 1970 Freddie Mac was created by Congress as a private corporation, to end Fannie Mae’s monopoly. Both corporations buy mortgages, pool them, then sell them to investors on the open market as mortgage-backed securities. This secondary mortgage market increases the supply of money for mortgage lending and therefore new home purchases. Currently Fannie Mae and Freddie Mac own or guarantee about half of the US’s US$12 trillion mortgage market. Therefore the subprime crisis has hit both corporations hard, necessitating US Government protection. The extent to which Fannie May and Freddie Mac actually caused or triggered the subprime crisis, is unclear. So now I, and you, know. Sort of.