Fannie Mae And Freddie Mac Delist On NYSE

By: Dr. Mike Campbell

The Great Depression saw record levels of home foreclosures in the USA as the recession put breadwinners out of work and they could no longer service their debts. There was a major liquidity problem in the financial system in general, and in the housing sector in particular. The Federal government sponsored the creation of Fannie Mae, not as a mortgage brokerage company but one with a remit to ensure liquidity by providing a secondary mortgage market. The idea behind this was that Fannie Mae would buy up primary mortgages from lenders thereby releasing money back to them which could be re-loaned to other home buyers in furtherance of the American dream of home ownership. Fannie Mae was hugely successful (not least because these deals were backed by a Federal guarantee) and by the 1970s had almost 100% of the secondary mortgage market. A rival was created by the government in the mid 1970s, Freddie Mac, to avoid giving (privately owned) Fannie Mae a monopoly.

Fannie and Freddie were able to sell securitised mortgage products to investors both nationally and internationally. These were debt purchases and, because of the Federal guarantees, they were treated as top-level investment grade bonds. The process continued during the heyday of the sub-prime boom and sub-prime products were included in the securitised bundles offered by Fannie and Freddie, as we now know, with disastrous consequences. When the sub-prime bubble burst Fannie and Freddie (also privately held) were left with massive problems.

Both of these mortgage companies were obliged to de-list on the New York Stock Exchange, yesterday, when their share values fell below the $1 mark. Between them, these two giants are estimated to guarantee $5 trillion in debt with an implicit guarantee that the Federal government will underwrite all of it – and they say Greece has a debt problem.