LINDA WERTHEIMER, host:
Two more major mortgage companies gave the market fits this week. The news that the government-backed companies Fannie Mae and Freddie Mac may also be in big financial trouble sent the market into a tailspin. We've asked our friend from the business world, Joe Nocera, to explain it all to us. He joins us from our New York bureau. Joe, welcome.
JOE NOCERA: Thanks. Thanks, Linda. How much time do we have?
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WERTHEIMER: Oh dear.
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WERTHEIMER: How can it be, though, that these two big companies that buy mortgages from banks can do this to the stock market?
NOCERA: Here's the dirty little secret. The stock market is the least of it. If Fannie and Freddie really went under or had to be taken over by the government, which they're talking about this week, if that were to happen, it has the potential to be a disaster for the economy, for the housing market, for everybody in this country because it has the potential to cause home buying and selling to simply freeze. These companies are what grease the wheels of the mortgage market. And they are, like them or hate them, they are incredibly necessary to the fabric of the economy. And that's why there's been all this panic this week on the news that they are in such trouble.
WERTHEIMER: Didn't Congress create these companies as a sort of a cushion? This is the thing that protects both the bankers and the buyers?
NOCERA: Well, yes. That's reason number one. And that's why the guarantee is such an important part here, that Fannie and Freddie guarantee the payment on the mortgage. The second reason, though, that's just as important, was because banks have to have a certain amount of capital for the amount of loans they have on their books, they could only - and don't forget when this all started, we didn't have national banks. We only had city banks or regional banks or small banks. So there was a very limited number of mortgages they could make. So the idea was you give somebody a mortgage, and then you sell the mortgage to Fannie Mae and you take it off your books. It increased the amount of money that could be made available for home mortgages, which was considered very important because home ownership is such a core part of the American dream.
And the mortgage market is now a 12-trillion-dollar market of which about half is touched by Fannie or Freddie either in the pass-through way or Fannie and Freddie actually backs and holds a lot of mortgages themselves and don't pass it on to securities. That's why if they were to stop or if they were to somehow break down, you'd have enormous problems because banks would no longer have this pass-through mechanism and would be much less willing to keep making home mortgage loans.
WERTHEIMER: So is what is happening now, is it a big surprise that Fannie Mae and Freddie Mac could get in trouble, and the whole economy could shake and quake?
NOCERA: Well, it depends on who you ask. The truth of the matter is Alan Greenspan has been hammering on this for years and raising legitimate concerns about Fannie and Freddie. And they had a huge scandal a few years ago where Franklin Raines lost his job - he was the former CEO of Fannie Mae - and they had to have write-offs that were due to accounting problems. I mean, these companies have not been stellar until this moment. This shouldn't be a big surprise.
The problem is that they're very, very well connected politically. They do something important. And they have very strong support in Congress, especially among the Democrats. It really makes you wish people had taken this seriously years before when there was a chance to do something about it, instead of now waiting for a crisis.
WERTHEIMER: Joe Nocera writes the "Talking Business" column for The New York Times. Joe, thank you.
NOCERA: Thanks for having me, Linda. Transcript provided by NPR, Copyright NPR.
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