Each of us is helping to pay a $10 million monthly grass mowing bill. Why? Because of homes that are owned by Fannie Mae and Freddie Mac. As GSE’s (government sponsored enterprises), Fannie and Freddie had purchased mortgages from financial institutions, sold the mortgages, and said they would guarantee them. When Fannie and Freddie ran out of money, tax payers became responsible for their obligations.
This is the way it works: John decides to buy a house. John gets a mortgage from a local mortgage broker. The broker sells John’s mortgage to Fannie Mae. Combining John’s mortgage with JoAnne’s and Jesse’s mortgages, Fannie Mae sells them as a package that pays interest to investors. When an investor asks Fannie about the mortgages, Fannie says, “Don’t worry. I will guarantee each one.” So, when John loses his job, defaults on his loan, and moves out of his house, Fannie rescues the investor by guaranteeing the payments that John had been making.
Meanwhile, Fannie got the house. As of the end of March, actually, Fannie and Freddie got 163,828 houses. Keeping insides clean and outsides neat cost them $1 billion last year. That means that it cost us $1 billion.
The Economic Lesson
Mowing a lawn brings to mind the “multiplier”. Assume that the contractor hired by Fannie had to purchase lawn mowers, and the lawn mower manufacturer hired extra workers, and those workers spent their paychecks on washing machines. Then the washing machine workers spent their paychecks on computers and the computer workers bought cars. Called the multiplier, this whole spending sequence happened because of the lawn mower maker. If a lawn mower cost $300 and $600 is added to the GDP because of the subsequent goods and service purchases the lawn mowers led to, then the multiplier is 2.Read More