Fannie and Freddie await their fate

15 July 2008 / by Rebecca Sargent
The future of America's mortgage market hangs in the balance today as Fannie Mae and Freddie Mac await their fate.

Good news came yesterday as Freddie Mac – which stands for Federal Home Loan Mortgage Corporation – successfully raised funds to the tune of $3billion.

However, according to reports, although Freddie's success indicates an underlying strength, it is not uncommon. Shares in both Fannie and Freddie have continued to drop since they began to fall on Friday as shareholders fear Government intervention.

Since the mortgage specialist's strife began, the US Treasury has stepped in to announce that it would shore up the companies that own more than half of the $12,000billion US mortgage market, if required. However, it has so far made no actual financial commitment.

Rumours are already beginning to circulate, suggesting that an alternative solution may come in the form of a financial institution who may be interested in a bail out. However, reports suggest that this is just speculation and such an act of heroism is looking doubtful when the sheer amount of debt involved is considered.

Fannie Mae and Freddie Mac specialise in the controversial industry which played a large role in causing the global credit crisis – the US mortgage market. Consequently, both companies have accumulated a collective $5.3trillion in debt as the US mortgage industry has fallen victim to an increase in defaults and repossessions.

The US Treasury has stepped in with a promise of funds because it is widely assumed that if these two main players fall to the ground, it will be the American taxpayer who will take the brunt of it.

Meanwhile, US bank IndyMac has been reopened following a takeover by federal management as a result of its customers panicking and withdrawing $1.3billion over 11 business days.

Other banks are also suffering in the US as its unstable economy begins to tumble. It is reported that Fannie Mae and Freddie Mac have suffered a share drop at the hands of short-sellers who spread malicious rumours before borrowing shares and making a profit. Bear Stearns in the US also fell victim to this, as did HBOS in the UK. Consequently, experts have warned that this behaviour must stop for the health of the US economy.

© Fair Investment Company Ltd