Fannie, Freddie and Your Investments

Many mutual funds owned these giant mortgage companies; did you lose it all?

ByABC News
September 9, 2008, 7:22 AM

Sept. 9, 2008 — -- For average investors and consumers, figuring out what the government seizure of Fannie Mae and Freddie Mac means can be tough.

The truth is that most of us possess only a vague understanding of what both companies do and why they are important to the U.S. economy. As a result, we're not sure whether to panic or celebrate Sunday's announcement that the federal government has taken control of two dominant forces in the nation's mortgage market.

Are the government seizures a sure sign of an economic apocalypse? Or will they reignite the sagging real estate market?

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The most likely answer: neither. The final impact will lie somewhere in between, but still there are lessons to be learned, dangers to be avoided and benefits to come.

Among the lessons, the most important -- once again -- is the importance of diversification when building an investment portfolio, particularly when company stock is available at attractive terms.

In less than a year, shares of both Fannie and Freddie both had lost more than 97 percent of their value as of midday Monday. That's a stunning fall for two stocks considered smart, reliable investments in the nation's housing market.

The pain has been particularly acute for Fannie Mae and Freddie Mac employees who loaded up on company shares when times were good. Fannie Mae offered an employee stock ownership plan that at the end of 2006 was worth $116 million, according to The New York Times. Today, that amount is worth less than $2 million.