Economics 101
Rob Price

If you're like me, you've been reading all about these two characters, Fannie Mae and Freddie Mac, and how they may wreck the U.S. economy.

And, like me, you're probably wondering how two people named Fannie and Freddie could have acquired so much influence over one of the world's largest economies, an economy that employs millions of people and producesmillions of vital commodities like plastic bottles for drinking tap water.

I've been wondering about Fannie and Freddie for several weeks, and so today I began looking into this complex economic situation, feeling confident that a man who earned a C- in his college macro-economics course could surely get a grip on things after a few hours on the Internet.

Well, am I surprised! It turns out - are you following me? - Fannie Mae and Freddie Mac are not two people whose names somehow slipped into the news. They are two corporations, with the more mundane formal names of Federal National Mortgage Association (That's Fannie) and Federal Home Loan Mortgage Corporation (That's Freddie).

If I had to go through life with the name Federal Home Loan Mortgage Corporation, I suppose I'd want a nickname too. But I'm still wondering how these two corporations got named "Fannie" and "Freddie." The name "Fannie" has always reminded me of a set of buttocks, and when I think of the name "Freddie,"I think of that silly character in "My Fair Lady," the guy who sings "On the Street Where You Live." And when I think of him, I don't think of a corporation that could bring the United States economy to its knees.

But I did find out some other things, such as: Back in the 1930s, the federal government created the Federal Home Loan Mortgage Corporation under the impression direct federal intervention in the private mortgage market would help people buy houses. Here's how it would work: Your local bank would write a mortgage for Mr. and Mrs Smith. Then the bank would sell that same mortgage to the Federal Home Loan Mortgage Corporation.

After a while, the Federal Home Loan Mortgage Corporation would gather a few thousand of these Mom and Pop mortgages together in a bundle and sell bonds that were based on the value of the mortgages. Get it? Mr. and Mrs. Smith would go on making their mortgage payments - but not to their local bank; they would now be paying some faceless entity called the Federal Home Loan Mortgage Corporation. That F.E. then would pay off the bonds it sold, using the monthly mortgage payments from hundreds and thousands of Mr. and Mr. Smiths. Meanwhile, the local bank no longer had tied up its cash in some house in Hornell or Bath or Corning, and it could lend its cash to another couple who wanted to impoverish themselves through home ownership.

What a brilliant idea, you say! Let's do it again! And sure enough that's what the government was thinking too when it created the Federal Home Loan Mortgage Corporation in 1970. But great ideas have a way of getting out of control, which is why Fannie Mae and Freddie Mac today control about $5 trillion worth of mortgages. In 2007, the entire national budget was around $2.8 trillion.

The tricky problem is, both Fannie Mae and Freddie Mac are classified as "government-sponsored enterprises," even though they are privately owned (You can buy stock in them; don't). What is a government-sponsored enterprise? No one really knows, but a lot of people have a hunch it means the sponsoring government (the U.S. federal government) somehow guarantees the financial health of the enterprise. Yes, many investors think the federal government will bail out Fannie Mae and Freddie Mac if they're about to collapse. Ha ha ha!

Well, maybe the federal government won't have to print $5 trillion worth of paper. We may get through this with only a $1 trillion bill for future taxpayers. The point is, Fannie Mae and Freddie Mac are like the bad sister and brother who go out and get into all kinds of trouble that their mother and father have to take care of.

Who's the mother and father in this case? Well, you and me. Which is why I'd like to find out where Fannie and Freddie really live.