What The Fuck Are Fannie Mae And Freddie Mac, Anyway? (The Mortgage Meltdown, Part Two of Seven)

[* The series as it unfolds:

1. You Unmitigated Bastards

*]

Before I begin, a note.

I will give the benefit of the doubt, and say that the architects of the legislation which led to this mess acted out of ignorance, rather than deliberate economic sabotage.

No-one's hands are clean here, which you will see, if you read the whole series.

But the Democrats' mistakes happened first in the timeline.

I am going to treat with events as they happened, and as such it may at first seem like I am giving only the Democrats a rough time. Don't worry; the Republicans will get theirs as the series progresses; it's just that their mistakes have, by and large, been in the last few years.

Again, please don't degenerate into name-calling and rock-throwing. No one individual or group is to blame here - although admittedly some have done more than others to help things along -
and no-one currently in our government is entirely blameless. I am trying to cover things as objectively and thoroughly as possible; in the process, some sacred cows will get slaughtered.

Some of them may be yours.

But because of the massive scope of this series of events, it's likely that everyone's toes will get tromped on to some degree, so I would ask that you please realize that you're not the only one with sore toes, and try to keep the debate civil.

That all said, the roots of this "crisis" are deep indeed; they go back to 1938.

Yeah, 1938.

Fannie Mae - more accurately, the Federal National Mortgage Association - was created in 1938, under President Franklin Delano Roosevelt.

President Three Names was looking for a way to re-capitalize the mortgage market following its collapse in the Great Depression. FNMA was created - basically - to loan federal money to banks, which could then be used for home loans, the idea being that it wouldn't cost the taxpayer "too much" and would allow a new wave of home ownership.

FNMA originally acted as a sort of bank for the banks; it loaned money at very low interest rates to the banks, which then used that money to provide low-rate mortgages to prospective homeowners. This basically created what we now call the "secondary" mortgage market, that being trading in the ownership of the loans themselves - both the home loans, and the BANKING loans.

This allows FNMA to make a profit - just recently, a MASSIVE profit - on the difference between the interest paid by the homeowners and banking customers of FNMA, and the rate FNMA had to pay on the money it borrowed from foreign investment bankers and governments.

That last sentence should clue you in that the "Buy America!" game has been playing for a long time.

In fact, FNMA was a huge budget item, and despite the fact that it was profitable, it was also overly complicated and required lots of work every year. President Lyndon Johnson solved this in typical fashion for him, by severing the Gordian knot of regulation with the sword of privatization, setting FNMA up as a "government - sponsored entity," or GSE. You'll be hearing that term a lot. At this time, FNMA STOPPED being the guarantor of government-backed mortgages, and became exclusively a secondary-market trader. The responsibility for government-backed mortgages was then transferred to ANOTHER new federal agency, called "Ginnie Mae," short for Government National Mortgage Association.

Being a GSE gave FNMA a board of directors and shareholders like any other publicly traded corporation, but with the added benefit of built-in bailouts; backed by the government, but not subject to it, FNMA was able to execute trades and deals that other banking entities could not, because the government - that means the TAXPAYER - was bound by the same law that privatized FNMA to support it with tax money. The deal gave FNMA tax-exempt status, and a permanent exemption from banking regulations.

Whoa.

Government interference in the free market to begin with, FNMA had become a monopoly on the secondary mortgage market that had been created by FNMA in the first place; now, it was cut loose to operate without supervision, without any return to the taxpayer, and without having to follow the same laws as other lenders.

So, since monopolies are obviously inherently bad and should be shot on sight, or some such thing, President Nixon then made things worse by adding yet another GSE to the mix: "Freddie Mac," the Federal Home Loan Mortgage Corporation. At this point, both FNMA and FHLMC began selling what are called "mortgage-backed securities," (MBS) which function essentially like municipal bonds, only they're backed by mortgage loans, instead of future tax revenues.

FNMA and FHLMC quickly took over roughly 90% of the secondary mortgage market, holding combined debt between them currently equivalent to 46% of the national debt, approximately $2, 665, 569, 360, 000 - that's right, over TWO TRILLION DOLLARS - becoming the only two Fortune 500 companies that are not required to inform the public about financial difficulties they may be having, and with built-in guaranteed bailouts by you and I.

Can you see where we're going, yet?

[* As promised, here is the information you'll need to contact your Congressional Representatives and Senators about this mess, if you are so inspired. I hope you will. I hope you're furious. I hope you're as furious as I am. I hope you tell them so at great length. Here's the info; enjoy.

U.S. House Of Representatives Member Directory By State

U.S. Senate Member Directory By State

And while I'm at it, the president's email address - I hope he gets a ton of viagra ads - is president@whitehouse.gov, and the Veep is vice_president@whitehouse.gov - so use them wisely and OFTEN. *]