On the surface Fannie Mae and Freddie Mac appear to have the names of wholesome individuals who enjoy sipping lemonade while lounging on their porch swing. However, the reality is that their names are actually semi-acronyms. Fannie Mae stands for the "Federal National Mortgage Association" and her younger brother Freddie Mac represents the "Federal Home Loan Mortgage Corporation."
Fannie Mae is the older branch of the government backed home loan agencies with a history dating back to 1938. At that time President Roosevelt and Congress created the organization as a way to help aid the economy after the Great Depression. Fannie Mae was set into motion as the agency was commissioned with buying toxic mortgages from lenders. The intent of the move was to make toxic mortgages became the responsibility of the government so the financial institutions would have their assets freed in order toget back in the business of loaning money to borrowers. Over time, the move worked and helped make homeownership (homeownership a reality for many Americans.
Fannie Mae was extremely successful, and that prompted the Lyndon Johnson administration to create Freddie Mac. The organization had grown so large that President Johnson wanted to prevent the company from becoming a monopoly and wanted to remove their debt from the government books. First, Fannie Mae became a publicly traded company in 1968 and two years later Freddie Mac was created. Freddie Mac eventually went public in 1989.
The biggest issues surrounding both Fannie Mae and Freddie Mac is that these two government agencies are also responsible for generating profits for private investors. To stay viable and generate revenue, the home loan providers opted to stay competitive with Wall Street and the trend of subprime mortgages that ended up fueling the mortgage meltdown. When the system started to unravel, Fannie and Freddie were very large components of the equation.
What is being done about Fannie Mae and Freddie Mac?
On the surface it may appear that both Fannie Mae and Freddie Mac were intentionally excluded from the new reform bill provisions because of the "cozy" relationship between the lenders and Washington. However, the reality is that because of the size of the agencies, the government opted to hold special conferences specifically addressing the future of the companies.
Because of the complicated relationship with Fannie Mae, Freddie Mac and the nation, the Obama administration has opted to develop a customized approach to the problem. The first meeting regarding the subject has been set for August 17, 2010 at the Treasury Department.
According to a statement made by Treasury Secretary Geithner (Meet the Press, NBC) the big plan is to implement massive revisions in the mortgage industry as a whole. In his option, he does not think that the Government will "... preserve Fannie and Freddie in anything like the current form."
What can be done about Fannie Mae and Freddie Mac?
Although here are a couple of options regarding the future of Fannie and Freddie, experts advise proceeding with caution. For centuries, the nation has built an economy based on the value of homeownership. Any immediate and drastic changes to Freddie and Fannie can further impede the nation's economic recovery.
While some experts are advising a complete financial take over of the entities by the government, others are promoting eliminating the entities altogether and leaving the mortgage industry in the hands of private lenders. In between there are plenty of hybrid alternatives.
According to Henry Paulson, the United States Treasury Secretary, Freddie and Fannie should be more like 'public utilities.' Paulson has stated "Reform should address the systemic risk they pose and should wean our mortgage finance system from its dependence on these institutions."
