I’ve never exactly understood in what way Fannie Mae and Freddie Mac were public or private entities, but I’ve had the vague understanding that the federal government somehow guaranteed home loans through these organizations. Now that they’re heading toward insolvency, it’s time to understand this stuff.
Apparently, my vague understanding was common but wrong. According to Robert Reich:
Investors in Fannie and Freddie have always believed that the loans issued by the two giants were guaranteed by the federal government but technically they aren’t. The guarantee has always been assumed but has never been put into law explicitly, and the liabilities have never been carried on the federal books.
Though it’s not obligated to do so, Dr. Reich believes that if Freddie Mac and Fannie Mae are heading for insolvency, the federal government will have to bail them out in order to combat the deepening economic crisis:
As a practical matter, we’re facing a Bear Stearns squared. Fannie and Freddie are way too big to fail — especially now. There’s no question the government will have to take over the companies, which means taxpayers will get stuck with the tab yet again.
Finally, here’s the heart of the problem:
Fannie and Freddie are treated like giant investor-driven entities as long as they’re healthy and their investors and executives are doing well. But when they start to go down the tubes they become public entities with public responsibilities, and the rest of us have to bail them out.