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Monday, September 8, 2008

he reason Fannie Mae and Freddie Mac had to be bailed out.

The reason of the rescue of Fannie Mae and Freddie Mac needed a helping hand.

Fannie Mae and Freddie Mac buy mortgages from approved lenders and then sell them on to investors - rather than lending directly to borrowers
They guarantee or own about half of the $12 trillion US mortgage market. They are relied on by almost all US mortgage lenders. Banks look for funds to meet consumer demand for mortgages when mortgage lenders are linked with investors - they help to keep the supply of money widely available and at a lower cost.

FREDDIE MAC & FANNIE MAE are the two largest firms that buy mortgages from approved lenders and then sell them on to investors - rather than lending directly to borrowers
They have guaranted or own about half of the $12 trillion US mortgage market. They are relied on by almost all US mortgage lenders and are looked to for funds to meet consumer demand for mortgages.


The companies have been taken under government control because they, according to President Bush, pose "an unacceptable risk" to the economy.
It will cost the US taxpayer at least $200bn to rebuild their capital - and the cost could be a lot higher if the US housing market continues to plummet.
Here is a unique that you may did not know... Despite Fannie and Freddy guaranteeing or owning just under half of the entire US mortgage market, you cannot actually get a home loan from either firm.
But while they are invisible to the average borrower, the two firms are highly influential institutions and are key to the US housing market.
As one US Treasury official puts it, the two firms are "way too intertwined with everyone in the world" to fail. Because banks around the world are highly exposed to the two companies.
And, given the unstable state of markets across the world, it had become dangerous for doubts to persist about whether they were viable and would be able to keep up the payments on their massive liabilities, said the BBC's business editor Robert Peston.
The Accounting flaws of the housing market turmoil has caused the firms great damage, its problems appear to be partly be to do with the way it managed its accounts - which had the effect of overstating its capital resources and financial stability.
The New York Times reported that Freddie Mac had pushed losses it had already incurred into the fourth quarter of 2008 - meaning that it would not have to be revealed until next year.
Fannie Mae had done something similar, but to a lesser extent, the paper said, adding that neither firm had necessarily breached accounting rules.
Both firms had also factored in tax benefits on profits that they were yet to see - credits which are worthless until profits are actually made - something neither has managed in the past year.
It was investigations by the Federal authorities into these irregularities that helped prompt the government to act.
The guarantees given by the US government were no longer enough. Even as Freddie Mac and Fannie Mae had profited from the US housing boom.
As the value of US homes soared, the importance of these two institutions grew in allowing people to purchase property.
The two firms do not lend directly to homebuyers, instead buying mortgage debt from approved lenders such as banks, and then selling it on to investors.



Almost all US mortgage lenders, from huge financial institutions such as Citigroup to small, local banks, rely on Fannie Mae and Freddie Mac, looking to them for the funds they need to meet consumer demand for mortgages.
The two firms argue that they make home ownership more affordable, lowering the interest rates on the 30-year mortgages that they guarantee.
But their peculiar status has left them in a grey area between being government owned and private sector, with potential risks to the taxpayer should they need bailing out.

The rescue at Freddie Mac and Fannie Mae contrast with the recent collapse of California-based IndyMac Bank - the second-largest financial institution to fail in US history, regulators say.
IndyMac had been struggling to raise funds and stay in business in one of the states worst hit by the US housing market slump.
Without similar close links to government it could not weather the storm, and went into administration.
But it is clear that Washington wants to keep Freddie Mac and Fannie Mae alive and kicking, not least so that they can play a key role in reinvigorating the housing market.
But there is a strong consensus that the price of not intervening would be far worse.

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