Fannie Mae, Freddie Mac, IndyMac ( In the News )

Everywhere you turned during the last week, you could not avoid bumping into these acronyms. Just who or what is Fannie Mae, Freddie Mac, and IndyMac? In what ways are they related if any? What is their relation to the current economic crisis? Where can I learn more?

Let's start with Fannie Mae, also known as the Federal National Mortgage Association(FNM on the New York Stock Exchange). The Federal National Mortgage Association was formed in 1938 during President Franklin Roosevelt's second term. From 1938 to 1968 Fannie Mae was a government agency. In 1968 under President Lyndon Johnson, it was privatized, becoming a government sponsored agency( GSE ), owned by private shareholders. From 1938 to 1970 it controlled the secondary mortgage housing market. In 1970 to provide competition congress formed Freddie Mac, also known as the Federal Home Loan Mortgage Association ( FLMA on the New York Stock Exchange). Both Fannie Mae and Freddie Mac are Government Sponsored Enterprises. Together they control the secondary mortgage market in the United States. They are regulated by Housing and Urban Development's Office of Federal Housing Enterprise Oversight.

What is the secondary mortgage market and how does it work? Fannie Mae and Freddie Mac purchase housing loans/mortgages made by US banks. ( They do not deal in individual loans to homebuyers.) They then bundle those loans into securities for sale on Stock Exchanges. Typically banks, national and international investors purchase these securities which represents, currently, 5 trillion dollars of debt. This is the significance of these two large banks. Should they
fail a worldwide economic crisis would be precipated. So Fannie Mae and Freddie Mac promote the American dream of home ownership by purchasing and selling housing debt.

What if the debt that is being sold is bad debt and not secured? An unknown percentage of their holdings is bad debt caused by individual bank's subprime loan practices. These are essentially unsecured mortgages lent to individuals who could not pay their loans as mortgage prices increased. Unpaid mortgages have led to foreclosures, and compounded foreclosures have led to liquidity crises for banks. In the case of the Pasadena, California bank, IndyMac, these bad loans led to a 1.5 billion dollar loss in five days, a run on the bank by panicked depositors, declaration of bank failure by the the Treasury Department's Office of Thrift Supervision and Federal takeover by the Federal Deposit Insurance Corporation ( FDIC ). another Great Depression agency founded under Franklin Roosevelt's auspices 75 years ago in 1933 to restore confidence in banks after their widespread failure.

IndyMac as of Monday, July 14, became IndyMac Federal Bank. Shareholders lost everything. Depositors of 100,000 dollars or less and IRAs of 250,000 or less are guaranteed. Uninsured depositors such as mutual funds may receive up to 50% as IndyMac's assets are sold off. IndyBank has billions of dollars in assets much of it gained through their subprime loans. As a side note, Sheila Bair, Chairman of the FDIC, is former professor of financial regulation, Islenberg School of Management, University of Massachusetts, Amherst, with many years of experience as a regulator. She is actively involved in the IndyMac takeover.

On Sunday July 13, the Federal Reserve acted to guarantee support for Fannie Mae and Freddie Mac, whose stocks had fallen below $10 a share. Should they need it Fannie Mae and Freddie Mac will be able to obtain direct assistance from the Reserve. The Berkshire Eagle interviewed several local bankers who saw little or no effect locally.

There has been extensive coverage of the financial crisis in the business media. Particularly noteworthy are thorough reports in Money Magazine online and Business Week. Where these crises are heading is still to be determined. Investigations have started and legislation is being developed.

The Berkshire Athenaeum has several books in its collection that can be helpful in understanding these important trends. Here are some: Surviving Financial Disasters by Tiffany R. Love; The Fed: the inside story of how the world's most powerful financial institutution drives the markets by Martin Mayer; The Foreclosures.com guide to advanced investing techniques you won't learn anywhere else by Alexis McGee; The Everything Guide to Buying Foreclosures by George Sheldon, and, for a historical perspective, Conrad R. Stein's The New Deal: pulling America out of the Great Depression.