Fannie Mae

The mission of Fannie Mae is to help more families to achieve home ownership. Fannie Mae does not, however, directly lend money to potential homebuyers. Rather, they have a relationship with mortgage lenders, banks, etc., in essence making sure the lender always has money available to people looking to buy a home. Fannie Mae, created in 1938 by the FHA, has evolved into a privately run, stockholder corporation.

Freddie Mac is another stockholder owned and run corporation that was chartered in 1970 by Congress. Freddie Mac operates by purchasing and selling mortgages financed by the sale of mortgage backed debt and securities.

The two corporations have developed into what can be called “quasi” governmental agencies. Simply stated, they are agencies originally begun through acts of government and over time have evolved into huge private corporations. They still, however, have powerful lobby interests in Washington and carry considerable clout in many political arenas. The interesting thing is, unlike a private lender, even though the two groups have racked up over 2 trillion dollars in debt, which continues to grow, they are not required to keep a reserve against potential losses.

What Fannie Mae and Freddie Mac have done is give the dream of home ownership to millions of people that otherwise would not be a homeowner today. They have worked to help create a market for these mortgage-backed securities from investors, which give the potential homeowner slightly lower interest rates and easier credit terms.

That in itself shows how these organizations played a role in creating the housing bubble. Making home ownership a more plausible option and giving people better access to money for a mortgage, in effect puts more people into the market for a home. This leads to increased demand. This leads to two things. Housing starts and new home construction rise and prices of existing homes on the market rise as more people are looking to buy and bid up the price of these homes. This has been the case since around the mid to late 1980’s and has continued today, helping to create the