Fannie Mae and Freddie Mac are the powerhouses of the home mortgage industry.  When lenders approve loans for buyers using their limited resources, Fannie Mae and Freddie Mac buy those mortgages.  In return, the banks and other cash cows are then free to RE-loan the money to new buyers.

Essentially, Fannie Mae and Freddie Mac take the loan burden away from the lender, thereby giving them their resources back to loan again.

Wall Street went all nutty today and flew off the deep end because of the rumor that Fannie and Freddie were in trouble and that the Feds were going to have to bail them out.  Thankfully the Chairman of the Banking Committee, Sen. Christopher Dodd of Connecticut, spoke up and said that a bailout is not needed. From CNN.com:

[Dodd] also vowed quick passage of a long-debated housing bill to give greater oversight of the two companies, saying he expected it to passed and ready to be signed into law sometime next week.

"There is a sort of a panic going on," he said. "The facts don’t warrant that reaction in my view. Fannie Mae and Freddie Mac were never bottom feeders in the residential mortgage markets. People ought to feel confident about them."

The reason it’s so important to make sure that Fannie Mae and Freddie Mac are viable - that they are the TRUNK of the lending tree supporting loans thorughout the nation - is because they do free up funding for home loans:

If they were unable to do so, it would significantly raise the cost and restrict the availability of mortgage loans, causing significantly more problems for already battered housing prices and sales. That in turn would be another significant problem for the overall U.S. economy, as well as global credit markets.

Kathy Lien writes a good ABC summary of the Fannie Mae and Freddie Mac problems.

The Internet is rife with speculation right now about the sustainability of these two mortgage giants.  If you’re thinking about buying a house, your credit is good, and your income can sustain it, now is the time.

Photo from here.