Fannie, Freddie central to U.S. housing market

By Mark Felsenthal

WASHINGTON (Reuters) - You can't get a mortgage from Fannie Mae and Freddie Mac, the huge U.S. housing finance companies whose financial health has rattled markets and raised the specter of a government bailout this week.

Nor can you walk into a branch office or open an account with either firm.

But invisible though the companies may be to the typical borrower, they are central to U.S. housing markets and very influential financial institutions. Their debt is held around the world and considered to be only slightly below gold-standard U.S. Treasury securities in quality. They own or guarantee nearly half of all U.S. mortgages.

Congress created the companies to ensure a deep and steady flow of funds to mortgages for home buyers of moderate incomes. The firms have strong political support among U.S. lawmakers of both political parties.

The two companies are also expected to play an integral role in pulling the U.S. housing market out of its worst downturn since the Great Depression -- if they can weather their current difficulties.

To some, they represent an ideal marriage of the private sector with the public interest.

To others, they create dangerous capital market distortions that put taxpayers at risk and crowd out other institutions from lucrative mortgage markets. Former Federal Reserve Chairman Alan Greenspan has told Congress he believes the companies could grow to the point that they would cause risk to the financial system.

LOWER HOMEOWNERSHIP COSTS

The companies argue that they lower interest rates on the 30-year fixed rate mortgages they guarantee, reducing the costs of homeownership for many Americans.

By buying mortgages from lenders and repackaging them as securities for investors, Fannie Mae and Freddie Mac provide lenders more funds to make further loans. Their automated underwriting systems have standardized mortgage lending and evened out regional U.S. credit disparities.

Chartered by Congress but privately owned, the companies are in a gray area between government and the private sector.

Their charters entitle them to $2.25 billion lines of credit to the Treasury that each firm could draw on in an emergency, lending them a stamp of government approval in the eyes of many. Yet they are privately held for-profit companies whose shares trade on the New York Stock Exchange.

The assumption by financial markets that the government would bail them out in a crisis means Fannie Mae and Freddie Mac can borrow more cheaply than purely private financial institutions.

At the same time, the companies are limited from lending directly to home buyers or from pursuing any other business line than mortgage finance. There are also upper limits to the size of mortgages they can buy.

BOOM AND BUST