Fannie and Freddie: A wild ride

Shares of Fannie and Freddie Mac are on a wild run, thanks to the anxiety surrounding these two behemoths. Both the firms’ recovery is very crucial for the economy as well as the housing market in the U.S.Investors shied away from the stock as they speculated a bailout by the government which would wipe out the value of the stock. The investors who hold the shares started selling it due to the speculation. Then the scene turned after two relevant happenings -

In one, a leading senator assured that here is no need of any bailout

In other, a Reuter report informed that Federal Reserve will open its discount window for both Fannie and Freddie.

The discount window was previously only open to the commercial banks. But after purchase of Bear Stearns, a Wall Street firm, engineered by Fed, the window has been opened to investment banks too.

Fannie and Freddie manage $5 trillion money, which is half of the mortgage debt in the country. Both play a major role in the housing market of the U.S. They fund banks and other home lenders. They convert pools of mortgage loans into securities and sell them to the investors.

If Fannie and Freddie are not able to provide mortgage loans to the lenders, then the cost and availability of mortgage loans will be affected greatly. The cost will go up and the availability of the mortgage loans will go down. This will not only create a significant problem for the U.S. housing market as well for its economy.