Fannie and Freddie: A Brief History
This article was written by Phin Upham,
Fannie Mae and Freddie Mac are the two largest mortgage companies in America, holding an estimated $5 trillion in debt. The institution was created during the Great Depression with the goal of buying up bad mortgages to free up capital.
The trouble was that banks found themselves strapped for cash when their customers couldn’t pay the bills. President Franklin D. Roosevelt created Fannie Mae and granted the institution $1 billion in buying power. This practice created the foundation for the system we have today, where low and middle-income buyers are able to afford loans for properties they otherwise would not be able to buy.
Fannie became so large that Lyndon Johnson turned the company public in 1968. The Vietnam War was putting pressure on the national budget, and Johnson needed more money to keep the war effort going. Within two years, the fed also created Freddie Mac as a kind of insurance policy. The thinking was that Freddie would ensure Fannie wouldn’t be run as a monopoly.
This continued until Freddie went public in 1989.
The two companies still exist today, although both have been criticized for poor business practices. The companies raise money to buy mortgages through pension funds, mutual funds and foreign government funding. The giants own enough debt that the Treasury Department has made guarantees to loan the companies money should they fail. While there is no definitive sign that America has hit another Great Depression, the amount of interest in these two companies shows the government concern for the financial turmoil.
About the Author: Phin Upham is an investor at a family office/hedgefund, where he focuses on special situation illiquid investing. Before this position, Phin Upham was working at Morgan Stanley in the Media & Technology group. You may contact Phin on his Phin Upham website