In IndyMac's Wake, Are Fannie Mae and Freddie Mac Safe?

Market fears run on large insurers.

ByABC News via GMA logo
February 19, 2009, 6:26 AM

July 12, 2008 — -- Fannie Mae and Freddie Mac are private companies with deep ties to the government.

Fannie Mae was created during the Depression as part of the New Deal as a way to revive a collapsed housing market by providing mortgage guarantees to low- and middle-income Americans.

Today they own or guarantee a mind-boggling $5 trillion in loans far more than any other lender, which is why the fear that they could go under has been so nerve rattling.

"If they were to go out of business, most of middle America would not be able to get a mortgage," said Howard Shapiro, an analyst for global adviser Fox-Pitt, Kelton.

Even if you haven't heard of Fannie Mae and Freddie Mac, there's a good chance, if you're a homeowner, they own your loan. Here's how it works: After a bank gives you a mortgage, it often packages it with other mortgages and sells it, most often to Fannie Mae or Freddie Mac.

If Fannie and Freddie were to fail, analysts say mortgage rates would soar, mortgage lending would grind to a halt and borrowers of all kinds would pay higher rates sinking the economy into an even deeper downturn.

That's why most analysts believe the government would never let it happen.

"Both Fannie Mae and Freddie Mac play such a vital role in the mortgage market," said Greg McBride, a senior financial analyst for Bankrate.com. "They are essentially too big to fail."

Government officials tried to shore up confidence in Fannie and Freddie. Sen. Chris Dodd, D-Conn., says there is no crisis and no bailout is necessary. "These institutions are in sound shape," he said. "The economics are fine in these institutions, and people need to know that."

But news late Friday saw another big mortgage lender, IndyMac, shut down by regulators. IndyMac's assets as of March 31 totaled $32.01 billion and its deposits totalled $19.06 billion. This news is likely to feed the psychology of fear that has been gripping the market.

Per a July 11 press statement from the Federal Deposit Insurance Corp., IndyMac "had about $1 billion of potentially uninsured deposits held by approximately 10,000 depositors." The FDIC has taken over the bank, which it described as the "fifth FDIC-insured failure of the year."