Government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have been hit by mounting losses as the mortgage crisis continues to intensify.
As mortgages reset & foreclosures continue to rise, the GSEs will see further write downs in the mortgages on their books, and will possibly require fresh capital infusions to meet government mandated Capital requirement levels.
The GSEs have been a key source of funding for banks & mortgage lenders by purchasing their mortgages and then packaging them for sale to investors.
Mortgage Lenders such as Countrywide Financial, will face a real crisis, if the GSEs slow down their mortgage purchases.
Heres a closer look at the two GSEs.
Fannie Mae (Federal National Mortgage Association (FNMA)
"A government-sponsored enterprise (GSE) that was created in 1938 to expand the flow of mortgage money by creating a secondary mortgage market. Fannie Mae is a publicly traded company which operates under a congressional charter that directs Fannie Mae to channel its efforts into increasing the availability and affordability of homeownership for low-, moderate-, and middle-income Americans.
Fannie Mae purchases and guarantees mortgages that meet its funding criteria. Through this process it secures mortgages to form mortgage-backed securities (MBS). The market for Fannie Mae's MBS is extremely large and liquid. Pension funds, insurance companies and foreign governments are among the investors in Fannie Mae's MBS. In order to promote homeownership, Fannie Mae also holds a large portfolio of its own and other institution's MBSs, known as its retained portfolio. To fund this portfolio, Fannie Mae issues debt known in the market place as agency debt.
Fannie Mae's "little brother" is Freddie Mac. Together, Fannie Mae and Freddie Mac purchase or guarantee between 40% to 60% of all mortgages originated annually in the United States, depending upon market conditions and consumer trends. "
Freddie Mac (Federal Home Loan Mortgage Corp (FHLMC)
"A stockholder-owned government-sponsored enterprise (GSE) chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing for middle income Americans. The FHLMC purchases, guarantees and securitizes mortgages to form mortgage-backed securities. The mortgage-backed securities that it issues tend to be very liquid and carry a credit rating close to that of U.S. Treasuries. Also known as "Freddie Mac".
Freddie Mac has come under criticism because its ties to the U.S. government allows it to borrow money at interest rates lower than those available to other financial institutions. With this funding advantage it issues large amounts of debt (known in the market place as agency debt or agencies), and in turn purchases and holds a huge portfolio of mortgages known as its retained portfolio. Many people believe that the size of the retained portfolio poses a great deal of systematic risk to the entire U.S. "
So what is a Government-Sponsored Enterprise (GSE) ?
"They are Privately held corporations with public purposes created by the U.S. Congress to reduce the cost of capital for certain borrowing sectors of the economy. Members of these sectors include students, farmers and homeowners.
GSEs carry the implicit backing of the U.S. Government, but they are not direct obligations of the U.S. Government. For this reason, these securities will offer a yield premium over Treasuries. Some consider GSEs to be stealth recipients of corporate welfare. Examples of GSEs include: Federal Home Loan Bank, Federal Home Loan Mortgage Corporation (Freddie Mac), Federal Farm Credit Bank and the Resolution Funding Corporation."
SOURCE: www.investopedia.com
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