When you're a big dog like the federal government and want to issue bonds or T-Bills, you guarantee your paper with the right of the government to tax its people.
But what happens when you're a medium-sized dog...like a government agency? If you're Fannie Mae or another government agency, and the government won't guarantee your bonds, you can issue agency bonds.
Related or Semi-related Video
Finance: What are Freddie Mac and Fannie...21 Views
What are Freddie Mac and Fannie Mae? while they're
government-sponsored loan vehicles that's what now first up Freddie Mac
Federal Housing loan mortgage corporations kind of rolls off your
tongue there doesn't it well they provide liquidity affordability and
stability in the housing market both Freddie Mac and Fannie Mae buy
mortgages from lenders they package and pool them like put them all in one easy [Lenders and Investors]
to buy a package and sell them to investors and this magic happens via
these government organizations providing money at reasonable interest rates to
banks savings and loans and other mortgage distributors who in turn lend
that money out to Joe the Plumber buying his relatively inexpensive first
or second home Freddie Mac was created during the Nixon administration to make [Nixon in a parade]
the buying of mortgages more liquid especially for the little guy the small
mortgage first time home buying public well a big driver in all of this was the
notion that owning your own home was a central part of the American Dream and [guy moving into a sold house]
that anyone and everyone who was willing to work hard and and generally do the [guy fixing pipes]
dance with you know the khaki pants should in fact be able to afford to own [people dancing in khaki pants]
their you know semi malfunctioning septic tank all yours baby Freddie Mac [septic tank getting emptied]
and Fannie Mae also packaged a bunch of mortgages and sell them into the
secondary mortgage market lenders can then have further liquidity and make [lenders, Freddie Mac, secondary mortgage market flow chart]
more loans stimulating the economy on many levels additionally these
organizations guarantee the timely payment of interest and principal to the
bank's loaning that money thus de-risking a lot of the loan risk from
an investor perspective and having the resulting outcome usually be cheaper
interest rates for the borrowers well Freddie's partner in this dance is
Fannie Fannie Mae aka the federal National Mortgage Association Freddie [fancy dancing]
leads in buying mortgages on the secondary market he puts them all in an
easily digestible investment vehicle and then resells them well the goal of both
Freddie and Fannie is to stabilize and expand the broader housing
market especially at the lower end there well the key difference economically
between the two is the supplier of debt or rather from whom they buy Freddie
buys from myriad smaller institutions in that secondary market whereas Fannie
buys from large commercial banks why does that work
no like this Freddie knocks on the door of the Bank of America mortgage loan [Freddie knocks on mortgage door]
Department in there a big national clearance center right there up in the
clouds he sifts through thousands of mortgages that fit one set of criteria
or another a certain loan size a certain duration to maturity a certain risk
level even geographic exposure like we're nervous about the southeast
because global warming is Florida gonna be a big swimming pool or not yeah well [map of united states, florida highlighted]
Freddie then creates a financial product in which investors can you know invest [Freddie picking up papers]
which is like seven billion dollars worth of mortgages in one unit well [box of $7 Billion worth of Mortgages]
maybe they have an average size of a hundred grand so in total in that unit [mortgages going into risk bucket]
there are at ten thousand of these small mortgages in one bucket which of all of
them pay fully to maturity as expected well then they will deliver to investors
a return of say six point two three four or five percent something like that and
everyone knows that there will be some defaults in these mortgages some
deadbeats who need lawyers that come after them to pay the bills they [guy driving car]
promised to pay some who have calamitous family situations that won't just don't [guy driving fancier car]
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]
their homes by the sheriff to go live in their station wagon or wherever they're [station wagon parked at lake]
forced to go live it's all part of the mortgage dance and Freddie's job is to
aggregate those loans and then resell them to investors who want to just write
one big fat check nut and thousand of them and Fannie Mae basically sprays [Freddie Mac $1B check]
wd-40 on the train track to let everything slip and slide along all the [WD-40 sprayed on train track]
more lovingly because it's very difficult to do the dance when you're
holding ten thousand cheques so yeah maybe Freddie and Fannie can help you [businessman dancing with bags of money]
hold those Oh
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