Why should you care about the fiscal health of Freddie Mac and Fannie Mae?
Even after Treasury Secretary Henry Paulson's announcement last night that the federal government is here to help, I still wasn't sure why, exactly, I should care. Well, these two "quasi-governmental" organizations were created by Congress to help make it easier to get home loans. They now back or insure more than five trillion dollars in mortgages. The mortgages are often bundled in mortgage-backed securities, which are sold on Wall Street. These securities are guaranteed — if a homeowner defaults on a loan, the Mac or the Mae pays it, and the investor doesn't suffer. But now, with foreclosures surging, they face the possibility of having to pay out more than they have in reserves.
So, IF Frannie&Freddie went under, it could cripple the credit markets and wreak havoc on the housing market, in which few would ever be able to get a home loan. So... If need be, the government will step in. Do you care yet? Here's another reason: This is a weird situation — if the securities are doing well, making money, investors receive dividends... but if they aren't, taxpayers make up the difference in the form of the government bailout. Huh? Exactly.