They've Gotcha Covered!

The Federal National Mortgage Association ("Fannie Mae") was originally founded during the Great Depression to help increase the amount of money available for home mortgages. It does not lend money. Instead, it buys mortgages from banks, packages them into securities and sells them in the open market.

The buyers of these securities receive interest from the cash flow generated by the mortgage payees, less servicing costs. Fannie Mae is a Government Sponsored Enterprise ("GSE"). In 1968, Fannie Mae was split into two companies--a private one, still called Fannie Mae, and a publicly-financed one, the Government National Mortgage Association, called Ginnie Mae.  More on Ginnie Mae below.

The Federal Home Loan Mortgage Corporation ("Freddie Mac") was charted in 1970 to do pretty much what Fannie Mae, now also private, was supposed to do--buy up mortgages and sell them in the secondary market. The difference between Fannie Mae and Freddie Mac is that Fannie buys mortgages issued by banks. Freddie buys those issued by thrifts (savings and loans).

It was always widely assumed that the assets of Fannie and Freddie were backed by the U.S. government. However, it was never explicitly made clear, and a significant number of experts within and without the government claimed otherwise. However, it turns out that foreign governments, including China, held (and stil hold) big stakes in Fannie and Freddie. The U.S. government had no choice but to bail them out when their loans went bad.

How bad? Initial estimates of the amount both would need was $25 billion. However, according to the Economist and Money Magazine, Fannie Mae has received more than $34 billion and Freddie Mac more than $52 billion. The total may go up to $100 billion.

Now, Ginnie Mae. It buys mortgages insured by FHA and the VA, and its portfolio has skyrocketed the last two years because of the low availability of mortgage financing. It now holds $680 billion in debt, all backed, explicitly, by the full faith and credit of the U.S. government--that is, us.