A Primer on Fannie and Freddie: What the Bailout Means

Who are these mortgage giants, and how might the intervention affect you?

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The U.S. government takeover of Fannie Mae and Freddie Mac made history yesterday. So, what do you know about these mortgage giants? Here is a quick primer on the two players:

1. Think of Freddie and Fannie as hybrids. They are both government sponsored and shareholder owned. They do not have direct contact with consumers; instead, they work with lenders. The job of Fannie and Freddie is to buy mortgages from banks, savings and loans, credit unions, and other lenders to ensure that mortgage funds are consistently available. Together, they hold or guarantee about half of the country's outstanding home loans.

2. The difference between Fannie and Freddie lies primarily in origin: Fannie Mae (the common name for the Federal National Mortgage Association) was born in 1938 under the leadership of Franklin D. Roosevelt to ensure a supply of mortgage funds under all economic conditions and to help lower costs to buy a home. It became a shareholder-owned company in 1968. In 1970, Freddie Mac (the acronym for the Federal Home Loan Mortgage Corp.) was created to provide competition and essentially ensure that Fannie wouldn't have a monopoly on government-backed mortgages. Freddie basically does the same thing: "Reduce the costs of housing finance and expand housing opportunities for all families, including low-income and minority families," according to its website.

3. So, what spurred the government bailout? Steep home-price declines and a rise in mortgage delinquencies and foreclosures have badly hobbled Fannie and Freddie. The two firms have registered roughly $14 billion in losses over the past year. If they had failed, the damage to the mortgage and housing markets could have had a catastrophic effect on the economy (and could have hurt Americans' ability to secure home loans, auto loans, and other consumer credit, Treasury Secretary Henry Paulson said in a press conference yesterday). The stocks of both Freddie and Fannie (FNM and FRE, respectively) have plunged over the past year—each from the mid-$50s to the mid-single digits.

4. The government's rescue plan will deal some tough blows to shareholders of Fannie and Freddie, including mutual funds holding large stakes in the companies. These funds most likely include Dodge & Cox Stock, Legg Mason Value, Vanguard Wellington, Fidelity Select Home Finance, and several American funds (Growth Fund of America, Investment Co. of America, and Washington Mutual), which all held a hefty percentage of shares in one or both of the companies as of the end of June.

5. Investors not holding shares of Fannie or Freddie may get a much-needed boost to their portfolios today: World markets soared, and U.S. indexes jumped early Monday. However, the longer-term effects on the markets aren't clear yet. Morgan Stanley wrote in a note to clients that if the positive reaction lasts, the plan will very likely help reduce the slide in housing activity. What also isn't clear is what the bailout's ramifications are for U.S. taxpayers.