"Fannie Mae" is a name derived from FNMA, the Federal National Mortgage Association, a government-sponsored enterprise that dates back to the New Deal--it was an attempt in the late '30s to help get the housing market going; "Freddie Mac" is a much looser derivation of FHLMC, the Federal Home Loan Mortgage Company, which is a much more recent creation (Nixon, I think) intended to provide competition for Fannie Mae, which effectively had a monopoly on trading mortgages. I can see how you get from FNMA to "Fannie Mae," but I've never quite understood "Freddie Mac" from FHLMC.

No, there are racial politics involved; that's why you also have the video kicking around of the interim CEO of Fannie Mae speaking at the 2004 ceremony welcoming new members (including Obama) to the Congressional Black Caucus, and talking about the CBC as a great long-time ally of Fannie Mae. Clinton-era changes to the Community Reinvestment Act pretty much mandated banks to expand lending standards as a way of breaking down red-lining (the practice of manipulating lending standards on a geographic basis to keep ethnic minorities from getting housing loans); the affordable-housing push was in large part a push to help minority families buy homes.

Yes, it was sincere on the part of members of Congress; this arose out of leftist political principles and emphases. No doubt the sizeable contributions made from Fannie Mae and Freddie Mac to the likes of Chris Dodd, Barney Frank, John Kerry and yes, Barack Obama helped reinforce their sincerity, though.

John McCain started pushing for reform of Fannie Mae and Freddie Mac in 2002; the Bush administration introduced a bill in 2003; another attempt was made in 2005. Sen. Obama never supported any of these efforts. (In fact, as a young lawyer, he helped represent a plaintiff who sued Citibank over their refusal to give him a home loan.)

And no, if Fannie and Freddie collapsed, it wouldn't in the least have left people owning their homes free and clear.

Oh, and for a quick rundown of where this all came from (with copious source material), check out the video I posted here, which the Anchoress has also posted a couple times.

Trying to explain this is simple terms is harder than explaining portions of the tax code to my clients. The reality is that there is a lot of truth in the video, but neither party is blameless.

Fannie Mae was started by FDR as part of the New Deal in 1938. It's name is a phonetic pronunciation of the letters of the government agency FNMA (Federal National Mortgage Association). It was privatized (more on this later) in 1968.

FM was started to insure or guarantee mortgages, and to expand home ownership by freeing up money at banks (called primary lenders) to do more lending. FM buys mortgages from the banks that originate the mortgages (assuming they meet current conforming guidelines) and then either keeps or repackages and resells them to other investors (i.e. Wall Street types, foreign countries, etc.). The key thing to know here is that in addition to the buying and selling of the mortgages, Fannie Mae usually offers a guarantee to the secondary buyer of the mortgages in the event the home owner defaults.

So why was FM ever necessary? Banks have limited capital. If they had to hold all the mortgages they write, they would be able to offer far fewer mortgages. By having the government take them off their hands and books, it frees up capital so they can write more. Homebuyers and banks don't have to use Fannie Mae, but the reality is that they do for most qualifying mortgages. Currently over half of all mortgages in this country (over $12 trillion worth) have been run through Fannie Mae in some fashion.

In 'normal' times, this is no problem. Fannie Mae operates and makes money two ways. It charges fees for the services and loan insurance it provides, and secondly it makes money on the interest spread from the buying and selling of the mortgages. Why are there interest spreads? Because Fannie Mae could borrow money at lower interest rates than any private bank could.

But now I have to backtrack to that privitizition thing in the 1960's. Why could Fannie Mae borrow money at lower interest rates? Well, obviously from 1938 until 1968 they could because they were actually a government agency with the full backing of the US government.

But as Fannie grew, the federal government had essentially the same issue as the primary banks did. The government didn't want all that mortgage debt and risk on its books either. So it privatized Fannie Mae in 1968.

But here's the rub. Since 1968, the federal government did not explicitly guarantee Fannie Mae's debt, but (wink, wink) it implicitly still told investors that it stood behind Fannie Mae's debts. This is the only way that Fannie Mae could continue to get that best-in-the-US low interest rate. And all those secondary Wall Street and foreign governments that bought up Fannie Mae loans and debt relied on that implicit backing of the US government.

So where do Franklin Raines and all those guys come into the story? Well, since Fannie Mae needed that continued government backing, they were obviously sensitive to political pressure. Which is why you had a series of former politicians heading up Fannie Mae rather than bankers. Fannie Mae positions were given out as a kind of patronage to former Congressmen, many of who were corrupt resulting in a series of scandals.

Also, that political pressure was used to force Fannie Mae to lower their lending standards to do more to guarantee sub-prime loans (i.e. people who otherwise wouldn't qualify for a mortgage). This was particularly important for minority Congressmen and Senators.

Now this post is long enough, but you can probably see the rest. Fannie took on more and more loans, with lower standards, and when the housing bubble popped (which was partly fueled by all those subprime loans to begin with) Fannie was facing huge losses on their guarantees and bankruptcy. To avoid that, the government (as expected) took Fannie back over to guarantee those mortgages to all the people who had bought them from Fannie.

Yes, racial politics were involved (not only African-American, but Latino as well). But the voting lined up more on the liberal vs. conservative lines.

I don't remember where I saw it, but somebody somewhere made a connection between this situation and mortgages that were given to "undocumented immigrants".

Well, the one person in the video was definitely playing the race card, saying the regulators were "lynching" one of the people who was responsible for this fiasco (i.e. saying it was a race-based attack that was otherwise baseless).

Amazing.

Take care & God bless
Anne / WF