Subprime Exposure Devastate Fannie Mae, Freddie Mac
Shares of Fannie Mae and Freddie Mac fell to their lowest levels in more than 17 years on Friday, July 11, amid growing concerns that a government bailout plan was part of the mortgage giants’ future.
Fannie Mae and Freddie Mac control nearly half of the entire mortgage market in the United States. Speculation of a government takeover has sent the companies’ publicly traded shares in downward spiral this week. Fannie Mae’s stock fell to $10 at the end of the day on July 11; last year, at this time, it was trading at approximately $70.
Shares of Freddie Mac closed at $8.05, after falling to an earlier low of $3.89.
Earlier in the day, Treasury Secretary Henry Paulson tried to play down fears that a government takeover was imminent, but his reassurances had little impact. If such action does happen, however, it would be unprecedented - and costly. Shareholders would likely be wiped out, with the losses on the home loans that Fannie Mae and Freddie Mac own or guarantee - half of all U.S. mortgages - paid by taxpayers.Â
In a news conference, Senate Banking Committee Chairman Christopher Dodd (D-Conn.) also tried to calm fears regarding the financial state of the two mortgage companies, suggesting they could be given access to Federal Reserve’s emergency lending program. The program, which was created in March as part of the Fed’s role in facilitating the purchase of Bear Stearns by JP Morgan Chase, provides direct loans to investment banks at a discount.
Who Are Fannie Mae and Freddie Mac?
Fannie Mae, short for Federal National Mortgage Association, and Freddie Mac, short for Federal Home Loan Mortgage Corporation, are shareholder-owned companies mandated by Congress to provide funding to the U.S. housing market.
Fannie Mae was founded in 1938. Until 1968, it was a government sponsored agency. Freddie Mac was established in 1970. Fannie Mae and Freddie Mac do not lend directly to homebuyers; instead, they buy mortgages from approved lenders and then sell them to investors.
The financial health of Fannie Mae and Freddie Mac is critical because of the momentous role they play in the U.S. housing market. The companies hold or guarantee more than $5 trillion worth of mortgages - roughly half of the $9.5 trillion debt of the United States. If one or both of the companies were to fail, it could unleash untold damage on the country’s financial system and the broader economy.
Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.
