September 10th, 2008 9:47 AM

Two agencies-the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") account for about 50 percent of all home loans transacted in the U.S. They exist under a mandate from Congress to ensure smooth functioning and financial liquidity within America's mortgage markets. By doing so, they help millions of families achieve homeownership. According to the federal government's Office of Management and Budget (OMB), "mortgage rates are 25 to 50 basis points lower because Fannie Mae and Freddie Mac exist."

But now, according to financial experts up and down Wall Street, and many officials within Washington, both are on the brink of bankruptcy. Although it traded in the $70 range within the past 12 months, Fannie Mae stock had plummeted to less than $6 a share on July 11th. Similarly, Freddie Mac shares lost approximately 50 percent of their value within a matter of hours, and fell from a 52-week high of more than $67 to trade below four bucks a share.

Potential mortgage failure

This basically means that our own federal mortgage companies, whose reputations are staked on taxpayer-backed assurances of financial support, are about to collapse and may need an emergency bailout. The adverse implications for mortgage consumers and homeowners are staggering. "The housing market can not recover unless Fannie and Freddie are out there actively securitizing home mortgages," a financial services analyst for research firm Stanford Group told CNN/Money reporters. Another expert said that if either of the organizations fails, it could easily send the entire country into a serious economic depression.

Trouble in Freddie City

Until the real estate bubble burst, the two agencies profited from an unprecedented worldwide demand and appetite for mortgage-backed security investments. In the profitable chaos of a frenzied marketplace, millions of loans were made to borrowers who couldn't afford them, and whose mortgage applications should never have been approved in the first place.

Real estate prices, mortgage commissions, and the value of mortgage-backed securities were all artificially inflated. The fast-cash environment similarly boosted consumer expectations of future gains in real estate to unrealistic levels. When the market fell apart due to an avalanche of defaults, it set off a chain reaction of economic woes that have finally threatened to bring down our most important and reliable mortgage institutions.

How will this catastrophe impact the average American? If the agencies go under, mortgage rates will rise and the economy may crash. The alternative is for the government to resort to a massive bailout. In that case, taxpayers will pick up the tab-and it will cost tens of billions of dollars. Either way, consumers lose. The only question is how much.

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