18 August 2010
Facing the collapse of Fannie and Freddies
Posted by selfprofit under: AdSense; Debt; Investment; Mutual Fund; Taxation .
Questions and answers about Fannie Mae and Freddie Mac and their role in the mortgage market:
Q: What are Fannie Mae and Freddie Mac?
A: The two government-created enterprises are the nation’s largest buyers of mortgages. They pool home loans from lenders and sell them with a guarantee that investors will get paid even if borrowers default MBA degree in radiology.
That effectively makes them middlemen between banks and investors. Fannie and Freddie hold or back more than $5 trillion in mortgages, about half the outstanding mortgage debt in the United States.
Q: Why were they created?
A: To give low- and middle-income Americans the chance to buy homes at a reasonable interest rate. They also ensure that homeowners can still get loans even in times of severe economic stress — such as the past two years. Fannie Mae was created by the government in 1938, when millions of families could not become homeowners or risked losing their homes; Freddie Mac was established in 1970.
Q: What problems do they face?
A: The two companies nearly collapsed in September 2008 after taking billions of dollars in losses when defaults and foreclosures soared. Their rescue has cost taxpayers more than $148 billion so far.
Q: Why did the government bail out Fannie and Freddie?
A: Officials from the Bush and Obama administrations say their seizure was necessary to make sure Americans could keep getting home loans even during the recession. Letting the two companies fail would likely have sent financial markets into a far more serious panic.
Q: Didn’t Fannie and Freddie traditionally back safe, traditional mortgages and avoid risky lending?
A: Until 2005, the companies largely stayed away from riskier loans. But they dramatically lowered their lending standards during the housing market’s boom years. Losses on loans made from 2005 through 2008 have soared. The two companies had about $336 billion in bad loans at the end of June, up from $320 billion at the end of last year. They owned about 191,000 foreclosed properties.
Q: What are some of the opti
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