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August 01, 2008

Who are Fannie and Freddie?

Two large corporations, Fannie Mae and Freddie Mac, have been in the news recently concerning their financial stability. Experts are worried about the link between these companies and the mortgage market and broader economy. Give us the details.

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, these names stand for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, and they are corporations that operate on what's called the secondary mortgage market. What that means is they go and buy mortgages that individual banks or savings and loans have made to people like you and me. They buy those mortgages then they sell them to investors. Now they do offer a tax advantage because although there is not an explicit backing by the federal government, it is thought that if these two big companies had problems, the federal government will back them. And this is exactly what's happening right now. They are having problems; we've seen their stock go down. The issue here is that these are gigantic corporations. Their total debt would come to five trillion dollars. And the federal government will not allow them to fall because if they did the entire mortgage industry could shut down. So there is likely to be some cost to the taxpayer of propping these corporations up for the time being. The question simply is, how much?"

Posted by Dave at August 1, 2008 09:07 AM