Fannie Mae and Freddie Mac are strange companies. Both of them are lending companies that operate largely independently of the Federal Government, yet they both have the full backing of the United States government. They are, essentially, guaranteed against going out of business by the Federal Government.

These companies are really quite unusual. They’re both publicly traded on the U.S. stock markets, and if you want to own them, all you have to do is call your stock broker. Yet still, there is the overriding government guarantee of their operations.

There are two problems:

• Both companies have taken a huge hit in market value of late due to the huge volume of bad loans on their books
• More importantly, it appears one or both of the companies are facing potential insolvency, requiring the raising of additional capital to keep them afloat.

The second point is the most troubling one. If either of those companies become insolvent, the problem shifts to the U.S. government as the guarantor. And according to a recent report in the Wall Street Journal, these companies have $5 TRILLION DOLLARS in total liabilities.

The answer, by the way, to whether Fannie or Freddie will go under, is no. The U.S. government will not (and can not) allow that to happen. But what are the practical effects on normal people like you and me if the government has to step up and cover the guarantees they’ve made for these companies?

• The real estate market will take another large hit, as the government will then be in control of vast amounts of private real estate which will have to be liquidated, ala the “Resolution Trust Company” situation of 2 decades ago
• The mortgage market will probably be vastly under-capitalized for some time, making mortgage money far more difficult to acquire
• The foreclosure crisis will deepen as more home owners will lose their homes due to non-payment
• It’s likely that your income (or other) taxes will have to be raised to pay the expenses of the government’s bailout of Fannie and/or Freddie

Currently, It doesn’t appear that either Fannie or Freddie will require a government bailout. One can only hope that that never happens.

But where did this crisis come from? I believe the blame has to be laid squarely at the feet of incredibly poor financial practices in the late 1990’s. Particularly, the former Federal Reserve Chairman Alan Greenspan took great delight in falsely pumping the economy of the United States by cutting interest rates to dangerously low levels, which motivated lenders to come up with new ways to get more money to more people, including those who really couldn’t afford it.

The lenders are to blame, for sure. But the grand fault lies with the Federal Reserve and the incredibly irresponsible fiscal policies of the 1990’s. And the fallout is severe: You may well face a much higher tax burden as a result of any government bailout of Fannie or Freddie.

Always remember: Every dollar that the government spends is YOUR money. So it’s you that has to bail out Fannie or Freddie if they fail, not the government. You are the guarantor of these companies.

This is why it’s so critical to use your right to vote to support candidates who do not support the expansion of government.

Have a great day, and thanks for reading FreeRealEstateTraining.com! As always, your comments and questions are welcomed in the comment area below.

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