Bankruptcy’s Not An Option For Fannie and Freddie

August 15, 2008 11:48 am Published by

One of my earliest blogs, I Never Thought I’d Be Here, got its name from the six-word statement I and my colleagues hear so often in our law offices around the state of Indiana. If Fannie and Freddie were people, they’d probably be making that very statement just about now.

“Fannie Mae” is a nickname for the Federal National Mortgage Association, and “Freddie Mac” is the nickname for the Federal Home Loan Mortgage Corporation.  Both are giant mortgage companies, falling into a category all their own, because, while they are not government agencies but shareholder-owned corporations, both companies are government-chartered.  Together, they guarantee more than half of all home mortgages in our country, some six trillion dollars’ worth.

FNMA and FHLMC buy mortgages from lenders, package them into investments, and then guarantee the principal and interest on those investments.  Over the years (FNMA was founded in 1938, FHLMC in 1970, both before I began my bankruptcy law practice), there’s been an “implied guarantee” behind the mortgage securities of Fannie or Freddie, meaning it was understood that the U.S. government would stand behind them if the need arose. Well, as of July 13th, that implicit guarantee became an actual guarantee.  The U.S. Treasury announced it is ready to provide whatever dollars are needed to keep Fannie and Freddie in healthy condition. 

I’m certainly no economist, but I do know a thing or two about safety nets.  For more than two decades, I’ve been a part of the U.S. bankruptcy safety net, counseling with tens of thousands of people – individuals, families, and business owners.  That bankruptcy safety net helps keep our economy going.  The new “explicit guarantee” provides the same kind of safety net for mortgages, ensuring that people will be able to finance home buying and investors will feel safe providing the cash for those loans by investing in mortgage obligation investments.

All in all, from my point of view as a consumer bankruptcy specialist and as someone who counsels people on financial matters, this is evidence of a system working the way it’s supposed to and of government making good on its promises.

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This post was written by Mark Zuckerberg

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