Article Source How did we get into this mess, and how do we get out of it? First, a little background: Both Freddie and Fannie were initially created by the U.S. Congress with the goal of expanding the residential mortgage market. They are for this reason referred to as "government-sponsored enterprises", or GSEs, even though both eventually were converted into private companies for which there is today no explicit government guarantee of their debt.... After a homeowner has borrowed money to buy a home, the original lender likely resold that loan to Fannie or Freddie. The GSE in turn collected some of those mortgages in a pool which was sold in the form of mortgage-backed securities (MBS) to private investors, for which the GSEs collect a fee in exchange for guaranteeing payment on the MBS. Other mortgages purchased by the GSE are held directly by the GSE for its own investment ...

Source This morning we were pleased to welcome Janet Yellen, President of the Federal Reserve Bank of San Francisco, to our UCSD Economics Roundtable. She focused on three main challenges: the housing slump, financial market turmoil, and commodity prices, which she likened to the three witches from Macbeth. Her complete speech is available from the FRB SFO Here are some excerpts. Janet Yellen (photo courtesy of FRB SFO). Housing. Unfortunately, it appears to me that there are at least three reasons for thinking that housing prices have further to fall. First, the ratio of house prices to rents-- a kind of price-dividend ratio for housing-- still remains quite high by historical standards.... Second, inventories of unsold homes remain at elevated levels.... Third, the futures market for house prices predicts further declines in a number of metropolitan areas this year.... Financial markets. ...