If you’re a casual reader or channel surfer, you probably heard that the government took control of two financial companies, Fannie Mae and Freddie Mac.  Should you be concerned and how does this affect the average person?  It could affect you in two ways.  First if you are a home buyer, your mortgage may be or have been originated through one of these financial institutions.  Secondly, if you own a managed investment like a mutual fund or variable annuity, it is possible it may own stock or bonds from the Fannie May or Freddie Mac.

In either case, there is no reason for immediate alarm.  Here’s a very brief history.  Fannie Mae and Freddie Mac are nicknames for Federal National Mortgage Association (abbreviated as FNMA) and Federal Home Loan Mortgage Corporation (abbreviated as FHLMC).  Both were created by Congress but have NO government guarantees.  Fannie Mae’s creation goes back to Franklin Roosevelt’s New Deal programs of the Great Depression.  In 1968, Fannie Mae was privatized and its stock made available to the public.  In 1970 Freddie Mac was created by the Congress so that Fannie Mae would not have a monopoly in the mortgage business. 

What do they do?  Simply put, Fannie Mae and Freddie Mac buy loans from lenders (banks, mortgage companies, etc.) and re-package them into a bond.  Remember a stock is direct ownership in a company and bonds are loans with guaranteed interest and a guarantee on the return of principal.  The bonds are then sold to the public.  This process gives the lenders more cash flow for more loans.

If you are a home buyer or owner, this is good news.  This step stabilizes the mortgage market.   These companies support the current mortgage market’s ability to fund new loans.  It takes away the fear of these two giant companies going under.  Loans may be more readily available.  The affect on the long term value of the stock of these two companies is still unknown.  I can’t stress the unknown outcome on the stock value enough.  For the individual investor, this is the point where professional research is extremely valuable.  The advice of our company is aimed at which managed portfolios (mutual funds, variable annuities) will fit a client the best.  The takeover of Fannie Mae and Freddie Mac does affect the overall market in the long term.  But the short term market affect is small for many reasons. 

According to Morningstar, 590 funds own Fannie Mae stock and 504 funds own Freddie Mac.  Three funds have slightly greater than 3% of their assets in Fannie Mae and only two funds have slightly greater than 3% of their assets in Freddie Mac. Other top holders of either stock represent less than ½ %.  The bottom-line is that the diversification of funds helps you in cases where any company’s value drops.  Professional management is the other value of fund investing.  A day to day monitoring of the progress of these stocks will help the portfolio managers manage the part that these stocks will play in their portfolio.

In my opinion the takeover of Fannie Mae and Freddie Mac is not like the government’s intervention into private companies like the airline industry.  I don’t think that we have to worry about mass government intervention or bail out of private companies.  Fannie and Freddie are creations of the federal government.  It was never a small company that grew.

It will affect the long term economy.  The government has estimated that they will infuse up to 200 billion dollars into both company’s operations.  In comparison to the airline bailout after 9/11, Congress only spent 12 billion dollars.  That is a huge difference.  In the long run that money comes from the federal budget (tax dollars).