The History

Fannie Mae (and Freddie Mac) purchase loans from banks and non-bank mortgage firms. They repackage the loans, as mortgage backed securities, and sell them on the secondary mortgage market, with a guarantee that the interest and principal will be paid, whether or not the original borrower pays.

Loosening Credit Standards
In 1999, Fannie Mae began a pilot program that eased their credit requirements on loans that it purchased from banks and other lenders. This in turn encouraged banks and lenders to lend to borrowers whose credit and profile could not typically qualify for conventional home loans. Fannie Mae and Freddie Mac increased home ownership and helped increase home values. However, this led to millions of consumers purchasing homes that were overvalued and at prices they could barely afford.

As GSEs, Fannie Mae and Freddie Mac are not required to inform the public about any financial difficulties that they may be having. Combined Fannie and Freddie have guaranteed over $5 trillion in mortgage debt. On September 7, Fannie and Freddie were placed into conservatorship. In response to the financial markets, the NASDAQ and DOW averages have continued to fall.

Warren Buffet, regarded as one of the greatest investors, was asked by in a September 24^th interview by CNBC, "Warren, you mentioned that Wall Street could not have taken another week like that. But what does that mean to the American taxpayer who's sitting at home saying, 'Why is this my problem?' "

Buffet responded, "Yeah, well, it's everybody's problem. Unfortunately, the economy is a little like a bathtub. You can't have cold water in the front and hot water in the back."

Current Situation
Treasury Secretary Henry Paulson has proposed a bailout plan to purchase the troubled assets with the hope of injecting liquidity into the market. As of September 26th, congress is in talks and no bailout plan has been accepted.

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