Fannie Mae and Freddie Mac sound like a homely mid-Western couple – dependable,

perhaps slightly dull.
But these two almost destroyed the US housing market and their downfall was the

overture to the global financial crisis.
On 7 September 2008, these giants of the financial world had to be nationalised

by the US government.
Fannie Mae was a child of the Great Depression.
The Federal National Mortgage Association was set up in 1938. A government

agency, its job was to buy home loans from mortgage providers.
The mortgage providers would use the money they received from Fannie Mae to make

more home loans. Freddie Mac, set up in the late 60s, did the same thing.
But once Fannie and Freddie held all these mortgages on their books they had to

do something with them.
The answer was “securitisation”. It’s a process which works a bit like a layer

cake.
You stack up all the mortgages horizontally and then slice them vertically.
Each slice contains a little bit of all the mortgages in the “cake” and can be

sold on the financial markets as a “security” – an investment like a share or a

bond.
But there was a flaw in the model.
If a sufficiently large number of homeowners defaulted on the underlying loans,

then the value of those mortgage-backed securities would collapse.
Fannie Mae and Freddie Mac would also be landed with the – very large – bill for

the mortgage repayments.
That’s what began to happen when the US housing bubble burst in 2007.
Millions of people defaulted on their home loans. The value of mortgage-backed

securities began to fall.
So too did the share prices of Fannie Mae and Freddie Mac.