Freddie Mac and Fannie Mae

The Federal National Mortgage Association (FNMA) commonly known as Fannie Mae was founded in 1938 during the Great Depression to make mortgages more available to low-income families and at the same time to facilitate liquidity within the mortgage market. The mechanism is rather simple, Fannie Mae purchases (takeover) home loans or other mortgage loans from banks and financial institutions so that banks and financial institutions have fresh money to provide more loans to house buyers. Fannie Mae then pools and repackages the homeloans and other mortgage loans into mortgage-backed securities (MBS) and sell these MBS to local and oversea investors ( oversea banks, investment funds, insurance companies, etc). Fannie Mae then uses the fresh money to buy more homeloans and mortgages form the banks and financial institutions and the whole cycle is repeated.

In 1970 US Government created Federal Home Loan Mortgage Corporation (FHLMC) commonly known as Freddie Mac to purchase home loans and mortgages on Secondary Market and the same mechanism is repeated, the loans and mortgages are pooled and repackaged and again sell to local and oversea investors as MBS. Each cycle will pump more money into the housing market.

Fennie Mae and Freddie Mac by repeating the process mentioned above together they own and securitize 70% of the total residential mortgage loans in the US. Thus the general perception is that they are 'too large to fail' and, therefore, will be bailed out by the Government should they get into any financial trouble. True enough, the effects on the subprime mortgage crisis have led the government to support the soundness of the obligations and guarantees on securities issued by Fannie and Freddie to obtain funds. As of 2008 the two of them owned or guaranteed about half of the US's $12 trillion mortgage market.

The Housing and Economic Recovery Act of 2008 passed by Congress in July 2008 gave the US Treasury the authority to advance funds for the purpose of stabilizing Fannie and Freddie. The Act raised the Treasury's debt ceiling by US$800 billion to a total of US$10.7 trillion in anticipation of the need for Treasury to have the flexibility to support Fannie and Freddie. From September 2008 to December 2008, the Government has spent $450 billion to take over the mortgage guarantees of Fannie and Freddie. In March 2009, the Government has proposed to spend another $750 billion on them. Last week the Obama administration's Mortgage Rescue Plan was finally underway to help homeowners avoid foreclosure. It is very obvious that the US Government will not allow Fannie Mae and Freddie Mac to fail.

On technical chart reading for Fannie Mae, I have to use both linear and semi-log charts to get a proper wave count (double clicks on chart to enlarge ). The linear chart above shows waves A-B and sub-wave 1-2 of wave C. The sub-wave 3-4-5 of wave C are as indicated by the following semi-log chart.
The Major corrective wave A-B-C was completed in November 2008. I am assuming the November 2008 low of US$0.30 is the bottom. Refer to the 6-Month short-term chart below, Fannie has completed wave 1-2 abd sub-wave 1 of wave 3 as shown.
Currently Fannie is at sub-wave c of sub-wave 2 of wave 3. This wave 2/3 is likely to end around US$0.60. wave 3/3 can go to a height of US$2.30

Freddie long-term wave counts is slightly different from Fennie Mae. Freddie wave c consists of 9 sub-waves instead of 5 sub-waves. Its wave 9 low of US$0.35 is likely to be the bottom. Since the March bottom, Freddie has completed wave 1 and sub-wave a-b of wave 2. Similarly wave 2 is likelt to end around US$0.60. A good entry point to ride on wave 3 that can go as high as US$2.50 (1.618x magnitude of wave 1)