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Fannie Mae and Freddie Mac |
Fannie Mae and Freddie Mac History
Fannie Mae and Freddie Mac are the two largest mortgage finance lenders in the United States of America. Fannie Mae was founded in 1938 with a mission to make mortgage programs more available to the low-income families. The Federal government converted it into a private shareholder-owned corporation in 1968. On the other hand, Freddie Mac was established in 1970 by the federal government to compete with Fannie Mae and to facilitate a more efficient secondary mortgage market in the country. Both the enterprises played an important role in the development of mortgage market of the nation that has allowed the citizens to benefit from being one of the highest home ownership percentage holders in the world.
Fannie Mae and Freddie Mac Bailouts
Fannie Mae and Freddie Mac offer a number of bailout programs for mortgage lenders and bankers in the country. The main endeavor of both the enterprise is to buy mortgages from the secondary market and sell them as mortgage-backed securities to several investors in the open market.
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As a consequence, the secondary market increases the supply of money that were available for mortgage lending thereby increasing the availability of money for new home purchases. Together, they own about $1.4 trillion or around 40% of the total mortgages in U.S. with $168 billion in subprime mortgages. The collapse of the housing market in United States and the subprime mortgage crisis that arise in 2007, have questioned the functions of these enterprises.
Fannie Mae and Freddie Mac Crisis
Freddie Mac alone hold about $120.8 billion in subprime mortgages, which is a very small percentage compared to its overall portfolio of threatening the agency's viability. The agency is also reported to raise $6 billion as new capital by making sale of preferred stock as a step to shore up its reserves. On the other hand, Fannie Mae announced that it will skip a benchmark debt offering for the very first time since May 2006. It may be considered as a signal that even high-rated mortgage backed securities provided by the corporation are being rejected in the secondary mortgage market. In addition, Fannie Mae has declared a quarterly loss of $1.4 billion in November and it will seek about $500 million with the help of new funds.
Fannie Mae and Freddie Mac buys home loans from approved mortgage lenders, either for cash or in exchange of mortgage-backed security. Buy purchasing mortgages, they provide banks and many other financial institutions with fresh funds to originate new loans. They provide flexibility and liquidity in the housing and credit markets of the United States.
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