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Alan Greenspan, Chairman, US Federal Reserve, has warned that Fannie Mae and Freddie Mac, which buy up and repackage billions of dollars’ worth of mortgages every year, have grown so rapidly and accumulated so much debt that they cannot adequately hedge against the risks of financial crises in the future.
Mr Greenspan said, the companies stand behind about $4 trillion worth of mortgages, which is about three-quarters of all single-family mortgages in the United States.
Originally chartered by Congress, Fannie Mae and Freddie Mac were initially created to expand the pool of money for home mortgages at a time when few banks or savings institutions operated on a nationwide basis.
The two companies essentially buy up mortgages from local lenders and bundle the loans into large securities, which they then resell on to financial markets.
Even though the Federal government does not guarantee the securities of Fannie Mae or Freddie Mac, Mr Greenspan suggested that their special status as “government-sponsored enterprises” and their huge size would make it difficult for Congress to avoid a bailout in the event of a financial calamity.
.... US Federal Reserve strongly crticises central banks of China and Japan
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