This week has been buzzing with news of the government takeover of Fannie Mae and Freddie Mac. It is a big deal as the NY Times called it a "In Rescue to Stabilize Lending, U.S. Takes Over Mortgage Finance Titans". It is an extraordinary move for the federal government to essentially bail out two gigantic mortgage lenders with public funds. If you've heard the names Fannie Mae and Freddie Mac but aren't sure about who they are, what they do, and why all this matters, let's start with the basics.

The Irish Times Newspaper has a great article "Fannie Mae Freddie Mac:Anatomy of a Crisis" that succinctly answers some of the fundamentals - What are Fannie Mae and Freddie Mac and What do They Do?

What are Fannie Mae and Freddie Mac? They are called government-sponsored enterprises because they initially were formed by the federal government. Fannie Mae is a common name for Federal National Mortgage Association. in Washington, DC. Freddie Mac is a common name for Federal Home Loan Mortgage Corp. in McLean, Virginia.
What do Fannie Mae and Freddie Mac do? Fannie Mae and Freddie Mac buy mortgages from savings and loans, banks and other lenders to generate more cash for those lenders to make more home loans. Together they hold or guarantee $5.4 trillion of mortgages, about half of the US's outstanding home loans.

So what happened? Well as home prices fell, foreclosures went up, and lenders ran into trouble, so did Fannie and Freddie. Loans they backed went bad, capital became harder to come by and it was harder for Fannie Mae and Freddie Mac to sell their loan packages. Thus, like any desperate, compromising soul, they lowered their standards and backed riskier mortgages and all this came back to bite them. Whether you are Sally-Homeowner or a big financial institution, you can't hide from sound financial principles and the truth of the matter. "So What Did Fannie Mae & Freddie Mac Do To Mortgage Rates?" That is what Quizzle asks:

Like many Americans having trouble selling their homes, ol’ Fannie and Freddie have been having trouble selling their packages of loans. The investors who typically buy from them have become much pickier about what they’ll buy - with good reason - they were worried about increased risk as mortgage defaults rose and home prices fell. Since the two companies own or insure about $5 trillion in mortgages (nearly half of the nation’s total), the world has been watching them very carefully. Especially the American government. In the opinion of the government leaders, Fannie & Freddie were headed toward failure. Since they’re so big, their failure would have dramatic (likely worldwide) consequences. So Uncle Sam worked the weekend and officially stepped in. So why are mortgage rates falling now? Think of it like this: Fannie and Freddie are kind of like big insurance companies. Before this announcement, investors worried that Fannie or Freddie might not be around to pay if mortgages they bought went sour. Worried investors = high mortgage rates for consumers. Now that Uncle Sam has stepped in, mortgage bond holders feel much safer. Happy investors = lower mortgage rates for consumers.

Wisebread has a superb post outlining the the winners and losers

in this bailout. As you might expect, guess who one of the biggest losers are?

American taxpayers - This bailout is not free. Noone knows the final damage this bailout will do to the Treasury, but most believe that the losses will be in the hundreds of billions. Considering that Fannie and Freddie holds approximately $5 trillion in home loans and currently more than 9% of loans are in the process of defaulting, then simple math tells us that these two companies could potentially lose $450 billion. Additionally, taxpayers will have to pay for the upkeep and operations of these companies so the costs will keep on increasing for years to come.

Some of the winners I never really thought of were interesting, particularly:

Banks that invested in Fannie and Freddie's debt - Fannie and Freddie sold trillions of dollars in mortgaged backed securities to central banks all around the world. For example, China's People's Bank owns more than $300 billion in Fannie and Freddie's mortgage backed securities. If both of these companies defaulted on all of these securites the Chinese national bank may have gone bankrupt

So in some respects the government is busy bailing out everyone at the expense of the taxpayers who DO manage to handle their finances responsibly. Nope, that group bears the brunt of every damn thing. In true political fashion, both Barack Obama and John McCain have issued their comments on the matter, including Sarah Palin misspeaking showing she doesn't even understand how these organizations work. Neither political candidate can wipe their hands of having no connection to the debacle as Muckety has a lovely chart and post at "Obama and McCain Both Have Ties to Fannie Mae and Freddie Mac".

As you might imagine, this is a very hot topic. Some people are calling it "Socialism for the Rich"

in a video that is pretty interesting and eye opening. It is a historic instance where the government is bailing out financial institutions with taxpayer money. While this may ultimately encourage new people to get into homes as the government is hoping, someone is missing the real boat. We have too many consumers making bad decisions when it comes to buying and financing homes; and we have institutions that are fueling those bad decisions by making bad decisions of their own and offering financial instruments like sub-prime mortgages, interest only, and back-end balloon mortgages that have only made things worse. Deb at "Sorting it All Out" puts it very simply:

I guess I see it as a parent who gets their delinquent kid out of jail every time they get into trouble....the kid keeps getting into trouble...and govt will have to keep on "fixing" everything and our children and grandchildren will inherit a country in financial ruin.

Wisebread gives us the real bottom line for us all:

Indeed, America is using public funds to take over more than 50% of the credit market. Whether this decision makes America stronger or weaker in the global economy is up for debate. As consumers, all we can do is be vigilant as to where our money is kept and be careful when we enter into important financial contracts. Finally, I hope that a positive effect that comes out of this giant mess is that Americans will learn to save again and realize that an economy held up by debt cannot be sustained.

Now that is one thing I know for sure -- this is certainly not a sustainable way to handle finances large or small. It will certainly be interesting to see the short and long term impact of this historic decision.

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Paula Gregorowicz, owner of The Paula G. Company, works with women who are ready to create their lives and businesses in a way that fits who they are rather than how they were told they "should". Get the free 12 part eCourse "How to Be Comfortable in Your Own Skin" http://www.coaching4lesbians.com and start taking charge of your own success. To get the latest word on personal finances from an LGBT perspective and Paula's practical coach approach to the topic check out Queercents http://www.queercents.com. Are you a small or solo business owner who wants to be comfortable in their own skin online via a website that is a true reflection of who you are and what your business is about? Paula's signature down to earth and "plain English" approach to website design and consulting can help. Visit http://www.paulagwebdesign.com to download the free successful website planner which will make your web project a breeze.