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Finance: What are Freddie Mac and Fannie Mae (FNMA)? 21 Views


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Description:

What are Freddie Mac and Fannie Mae? They sound like snack cakes to us, so, uh...maybe we should watch this video.

Language:
English Language

Transcript

00:00

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

00:07

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

00:12

Federal Housing loan mortgage corporations kind of rolls off your

00:17

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

00:21

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

00:25

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

00:29

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

00:35

these government organizations providing money at reasonable interest rates to

00:39

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

00:44

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

00:49

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

00:54

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

00:59

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

01:03

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

01:09

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

01:14

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

01:18

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

01:23

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

01:27

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

01:31

more loans stimulating the economy on many levels additionally these

01:35

organizations guarantee the timely payment of interest and principal to the

01:40

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

01:45

an investor perspective and having the resulting outcome usually be cheaper

01:49

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

01:53

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

01:59

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

02:03

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

02:08

Freddie and Fannie is to stabilize and expand the broader housing

02:12

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

02:15

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

02:20

buys from myriad smaller institutions in that secondary market whereas Fannie

02:25

buys from large commercial banks why does that work

02:28

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

02:32

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

02:35

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

02:40

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

02:46

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

02:51

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

02:55

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

02:59

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

03:04

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

03:08

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

03:12

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

03:17

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

03:21

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

03:24

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

03:27

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

03:32

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]

03:36

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

03:40

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

03:44

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

03:48

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

03:53

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

03:57

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

04:01

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

04:05

hold those Oh

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