Shares in US mortgage firms Freddie Mac and Fannie Mae have fallen by as much as 50% in selling frenzy at the Stock Exchange in New York..

The two companies play an important role in the financial markets in providing funding for home loans by buying up mortgages and packaging them as investments.

As mortgage backers, the companies have had to pay out when homeowners have defaulted on their loans.

President  Bush was briefed on Fannie Mae and Freddie Mac earlier today.

 In early afternoon trading in New York, Freddie Mac shares were down 23% at $6.16 after falling as much as 51% shortly after the market opened. Shares of Fannie Mae were down 29% at $9.33 after sliding as much as 49%.

Most analysts feel that it is unthinkable that the companies would be allowed to fail.

If necessary support from the U.S. Treasury would offer some form of support.

This is a huge blow to the US economy and has sent shivers around the financial world.

 

Background

From 1938 to 1968, the secondary mortgage market in the United States was monopolized by the Federal National Mortgage Association (Fannie Mae), which was a government agency during that period. In 1968, to help balance the federal budget, part of Fannie Mae was converted to a private corporation. To provide competition in the secondary mortgage market, and to end Fannie Mae's monopoly, Congress chartered Freddie Mac as a private corporation.

The Federal National Mortgage Association (FNMA) (NYSE: FNM), commonly known as Fannie Mae, is a government sponsored enterprise (GSE) of the United States federal government. It is a shareholder-owned corporation authorized to make loans and loan guarantees. It is not backed or funded by the U.S. government, nor do the securities it issues benefit from any statutory government guarantee or protection.

Freddie Mac's &  Fannie Mae's primary method for making money is by charging a guarantee fee on loans that they have purchased and securitized into Mortgage-backed security bonds. Investors, or purchasers of Freddie Mac MBS, are willing to let Freddie Mac keep this fee in exchange for assuming the credit risk, that is, Freddie Mac's guarantee that the principal and interest on the underlying loan will be paid back regardless of whether the borrower actually repays.