The $5 trillion mess

Fannie Mae and Freddie Mac were created by Congress to help more Americans buy homes. Now their shaky condition threatens the entire housing market.Fannie Mae and Freddie Mac owns $5 trillion mortgage value, which is half of the country’s total outstanding home loan debt. Now, when these behemoths shows signs of weakness, then where should the home owner turn to?

Both the giants in home mortgage are struggling at this point of time. Investors are losing out the confidence on both these two lenders. Though they will not go under but their functions will be considerably impaired following the loss of customer confidence. This will be another addition to the already crumbling housing market. The result will be problem in getting mortgage loans and increase in the cost of mortgage loans.

These two are government sponsored enterprises. Fannie Mae was created in 1938 by Congress and Freddie Mac in 1970. The main objective was to help Americans buy houses. They were created to maintain the market. They buy loans from the banks, convert them to securities and then sell them in the market. These operations helped banks as they took on the risks of missed payment, swings in the interest rates and defaults.

Both of them operated in a risky manner piling risk after risk, without any capital cushion, which ultimately resulted in the crisis. In the past both firms either overstated or understated their earnings and did all the mistakes that a company cannot afford.

Now, in the stormy situation of the lending market with higher foreclosure numbers, and fluctuating interest rates, investors are losing faith in Fannie and Freddie.