The Fannie Effect: Financials Feeling The Hurt

Jitters about the solvency of Fannie Mae and Freddie Mac, two government-sponsored mortgage financing companies, took a big toll on financial-industry stocks Friday. Looming over Wall Street was the fear that if these companies should fail, it might completely shut down the market for mortgage-backed securities.

But it wasn't just a deepening freeze in the securitization market that had investors rushing to sell shares of firms such as Lehman Brothers and JPMorgan. "It is impossible to contemplate all of the negative events that will occur if Fannie and Freddie go under,'' Richard Bove, an analyst at Ladenburg Thalmann, told Bloomberg News.

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Comments

[CrazyDogLady]

actually they are not lenders....they are institutional investors (which yes, sounds scary...) No one ever writes their monthly mortgage check to Fannie Mae or Freddie Mac even though combined they own 50% of the mortgages in the U.S.

Freddie and Fannie actually underwrite (provide the loan money) to the loan originator (lender) which makes you sign all of the papers at closing...

Basically....let's say I live in "SofaKingAwesome, America" - a town population 100 and I want to buy a house for $100,000.

So - I live in a town with 100 people - unless the bank has $100,000,000 cash in deposits in the bank they can not lend every single of the 100 nice town folk the $100, 000 for a home...

However, if I look outside the limits of my small town - there is money out there to borrow so I can create my home-sweet-home. So what Fannie and Freddie do - is that when you go to the National Bank of SofaKingAwesome America and they lend you $100,000 for a house...the SofaKingAwesome bank actually "sells' the loan to an investor (Freddie or Fannie) which gives them the $100.000 upfront for the loan and then makes all of their money off of the interest...

[Badbone]

IANAE (I am not an economist) but it seems to me it would allow millions of people to default on their mortgages and the American taxpayer would be forced to cover the loss. Like the S&L bailout, or the FDIC.

Good deal if you"re a mortgage holder. Deafult on your loan and let someone else pay for it. Not so great for everybody else.

[velkyrie]

So what does this mean to the average American? At the risk of sounding ignorant, I'd love it if someone could explain the downstream implications in plain English for those of us who don't read the investment page. Thank you... :-)

[brooklyncitizen]

Well for one it will be tougher to acquire a loan if you can purchase a home.They are the biggest lenders.