Freddie and Fannie: an American racket

America's credit crisis has already had as many false endings as your average slasher film. And now, just as you thought we were out of the woods, along come Fannie Mae and Freddie Mac, which may sound like an old Vaudeville act but in fact are the two biggest players in America's mortgage business.

Last week, their share prices fell sharply on reports they were now in deep trouble. If they were to collapse, it would make the Bear Stearns fiasco look about as significant as a bounced cheque. Hence President Bush's intervention today, offering taxpayer help to prop them up.

Fannie Mae - officially the Federal National Mortgage Association - was created in 1938 by President Roosevelt to encourage banks to issue mortgages during the Depression. It was privatised in 1968. Freddie Mac - the Federal Home Loan Mortgage Corporation -

was created in 1970 to support home ownership and the building of rental housing for people with lower incomes, and is also a private company.

Both Fannie and Freddie are subject to federal oversight and are traded on the New York Stock Exchange.

What both firms do, essentially, is buy the mortgages issued to home-buyers by banks. This enables the banks to cash in the loans they have issued immediately, without having to wait for all those payments to come in, and issue more loans. Freddie and Fannie then package their loans into bonds and sell them as supposedly conservative investments back to investors.

The problem now is that no investors are buying Freddie's and Fannie's loans, so Freddie and Fannie cannot buy loans from the banks. The drying up of their spigot has gummed up the entire mortgage system.

Compounding this is the fact that over the past two decades or so, Freddie and Fannie have behaved less like quasi-governmental outfits, goosing the housing market as and when necessary, and more like the worst