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Avignon Realty & Mortgage Cartoons

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									Avignon Realty & Mortgage Cartoons

Presented on: 7/24/08

Avignon Realty & Mortgage Focus: Freddie Mac & Fannie Mae

Presented on: 7/24/08

Story time
Mortgage Industry

Freddie & Fannie

Government Sponsored Enterprise
• GSEs are financial service corporations created by the US congress • Because they count as privately owned they are kept off Government books • Their function is to enhance credit flow in targeted sectors of the economy • Targeted sectors: agriculture, home finance, education • There are 5 total GSEs • 4/5 of GSE’s total credit portfolio comprises of Freddie Mac & Fannie Mae

Mortgage Markets
• Primary vs. Secondary
Level 1: Borrower & Mortgage Lender Level 2: Mortgage Lender & Freddie/Fannie Level 3: Freddie/Fannie & Bond Market • Mortgage Backed Securities • US has a very powerful secondary market unlike any other country

Brief History
• Fannie was Founded in 1938 • It monopolized the secondary market for 30 years • LBJ made it public in 1968 to reduce the load on the government in the was era • Freddie was born in 1970 • Got listed in 1989

Rescuers need rescuing
Gov was counting on Freddie & Fannie to buy more mortgage and rescue the housing industry from crisis

Understanding Freddie & Fannie
• • • • They own/guarantee about half of all Mortgages Implicit Government guarantee on MBS Could cheaply fund themselves Far less capital than banks but much more latitude • Enjoy exemption from some taxes • Critics should expect a rough ride. • Regulators go through a though time

What exactly happened ?
• Belief in the implicit government guarantee allowed the pair to borrow cheaply. • i.e Profit is privatized but losses are socialized • They could earn more on the mortgages they bought than they paid to raise money in the markets. • It also allowed Fannie and Freddie to operate with tiny amounts of capital. • The two groups had: Core capital: $83.2 B at the end of 2007  Supported: $5.2 T of debt and guarantees  Ratio: 65 to 1.

Fixing it will cost the Gov. $25 B The end


								
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