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Originally Posted by Mikhayl
Internet hates/ate my sarcasm 
Privatization of profits and globalization of the losses at its best. I've read the government is ready to put 100 billions in each of the 2 companies which basically got bankrupt because of their greed. Now how much was the ludicrous amount of money asked in the thread the other day about rebuilding New Orleans ? |
Well actually the government is not putting any money into the two companies. All the government is doing is guaranteeing the loans that Freddie and Fannie sell to investors. So it is not a corporate "bail-out" like has happened in the past.
The government will have to pay money only in the instances where both of the follow occur.
1. Fannie/freddie could not sell their bundled loan bonds to investors and
2. The original borrower defaults on the loan.
Here is a quick review of what Freddie/Fannie do.
a. Citizen A borrows money from Bank B for their house
b. Bank B sells the loan to Fannie or Freddie. Bank B now has money to lend to Citizen D.
c. Fannie/Freddie bundles up these loans from across the country and bundle them up into investment packages and sells bonds to investors such as your mutual funds. Fannie/Freddie will guarantee the loan to the investors. Fannie/Freddie now have money to buy more loans from Bank B (and many other banks)
And the very nice circle continues.
What has happened is that investors are becoming reluctant to buy the mortgage bonds from Fannie/Freddie. This has less to do with anything Fannie/Freddie have done "wrong" and more to do with the general economy.
However, since the business model of Fannie/Freddie requires the passing of the mortgages in the form of bonds, When investors start slowing down, Fannie/Freddie are stuck with loans that they can't sell (or more accurately can't sell at the appropriate interest rate).
If Fannie/Freddie can't sell the bonds, Fannie/Freddie don't have any money to buy more loans from the banks.
If Fannie/Freddie can't buy loans from the banks, the banks don't have money to lend people.
As banks are loaning out less money, the interest rates for mortgages go up.
And an undesirable circle continues.