Cause and Effect in European Politics and Law

Fannie Mae and Freddie Mac will be fragmented

Adelina Marini, August 6, 2009

Almost a year after the bankruptcy of the two biggest mortgage giants in the US Fannie Mae and Freddie Mac, the administration of the president Barack Obama is considering an overhaul of the companies which have hundreds of billions of dollars in troubled loans. The idea is to create a new structure to support the home-loan market, government officials said, quote by the Washington post. The bad debts the firms own would be placed in new government-backed financial institutions -so-called bad banks - that would take responsibility for collecting as much of the outstanding balance as possible.

Fannie Mae and Freddie Mac became emblematic of the financial crisis when they were effectively nationalized in September last year. The government has since pledged more than $1.5 trillion, including $85 billion in direct aid, to keep the mortgage market working through the 2 companies.

The proposal for the restructuring of the companies still has to pass a long a way before it becomes a decision. But a major problem is that the firms own and insure trillions of dollars of existing mortgages. Given the economy is still in a deep recession, joblessness rising and defaults on home loans expected to continue to go up, there is great uncertainty over the size of future losses at Fannie Mae and Freddie Mac. That, in turn, is likely to drive investors from committing money to the companies.

Both companies existed for years as odd hybrids, created by government to support housing but owned by private shareholders. Over the years, the unusual status has fed concerns that the firms exploited their quasi-governmental role to borrow money at very low rates and therefore grow far larger than was sustainable. At the same time, they had a duty to shareholders to maximize profits, leading them to take on bigger risks, the newspaper recalls.