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What are Freddie Mac and Fannie Mae? while they're

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government-sponsored loan vehicles that's what now first up Freddie Mac

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Federal Housing loan mortgage corporations kind of rolls off your

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tongue there doesn't it well they provide liquidity affordability and

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stability in the housing market both Freddie Mac and Fannie Mae buy

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mortgages from lenders they package and pool them like put them all in one easy [Lenders and Investors]

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to buy a package and sell them to investors and this magic happens via

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these government organizations providing money at reasonable interest rates to

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banks savings and loans and other mortgage distributors who in turn lend

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that money out to Joe the Plumber buying his relatively inexpensive first

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or second home Freddie Mac was created during the Nixon administration to make [Nixon in a parade]

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the buying of mortgages more liquid especially for the little guy the small

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mortgage first time home buying public well a big driver in all of this was the

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notion that owning your own home was a central part of the American Dream and [guy moving into a sold house]

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that anyone and everyone who was willing to work hard and and generally do the [guy fixing pipes]

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dance with you know the khaki pants should in fact be able to afford to own [people dancing in khaki pants]

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their you know semi malfunctioning septic tank all yours baby Freddie Mac [septic tank getting emptied]

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and Fannie Mae also packaged a bunch of mortgages and sell them into the

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secondary mortgage market lenders can then have further liquidity and make [lenders, Freddie Mac, secondary mortgage market flow chart]

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more loans stimulating the economy on many levels additionally these

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organizations guarantee the timely payment of interest and principal to the

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bank's loaning that money thus de-risking a lot of the loan risk from

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an investor perspective and having the resulting outcome usually be cheaper

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interest rates for the borrowers well Freddie's partner in this dance is

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Fannie Fannie Mae aka the federal National Mortgage Association Freddie [fancy dancing]

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leads in buying mortgages on the secondary market he puts them all in an

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easily digestible investment vehicle and then resells them well the goal of both

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Freddie and Fannie is to stabilize and expand the broader housing

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market especially at the lower end there well the key difference economically

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between the two is the supplier of debt or rather from whom they buy Freddie

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buys from myriad smaller institutions in that secondary market whereas Fannie

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buys from large commercial banks why does that work

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no like this Freddie knocks on the door of the Bank of America mortgage loan [Freddie knocks on mortgage door]

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Department in there a big national clearance center right there up in the

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clouds he sifts through thousands of mortgages that fit one set of criteria

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or another a certain loan size a certain duration to maturity a certain risk

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level even geographic exposure like we're nervous about the southeast

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because global warming is Florida gonna be a big swimming pool or not yeah well [map of united states, florida highlighted]

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Freddie then creates a financial product in which investors can you know invest [Freddie picking up papers]

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which is like seven billion dollars worth of mortgages in one unit well [box of $7 Billion worth of Mortgages]

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maybe they have an average size of a hundred grand so in total in that unit [mortgages going into risk bucket]

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there are at ten thousand of these small mortgages in one bucket which of all of

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them pay fully to maturity as expected well then they will deliver to investors

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a return of say six point two three four or five percent something like that and

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everyone knows that there will be some defaults in these mortgages some

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deadbeats who need lawyers that come after them to pay the bills they [guy driving car]

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promised to pay some who have calamitous family situations that won't just don't [guy driving fancier car]

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let them have the dough to pay and sadly they will be escorted kindly out of [coffin in church, guy moving out of foreclosed house]

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their homes by the sheriff to go live in their station wagon or wherever they're [station wagon parked at lake]

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forced to go live it's all part of the mortgage dance and Freddie's job is to

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aggregate those loans and then resell them to investors who want to just write

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one big fat check nut and thousand of them and Fannie Mae basically sprays [Freddie Mac $1B check]

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wd-40 on the train track to let everything slip and slide along all the [WD-40 sprayed on train track]

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more lovingly because it's very difficult to do the dance when you're

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holding ten thousand cheques so yeah maybe Freddie and Fannie can help you [businessman dancing with bags of money]

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hold those Oh

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