What Happened to Fannie Mae and Freddie Mac?

Here is an informative article outlining the chain of events leading up to Fannie and Freddie's demise. Here's the basic outline:

• Banks loan money (mortgages) to homeowners to buy houses.
• Banks then sell these mortgages to other institutions, get back the money they had loaned to the homeowner and then lend it to somebody else.
• Fannie and Freddie's charter was to buy these mortgages so that banks could keep lending money and expanding the pool of homeowners.

  Fannie Mae and Freddie Mac "provide liquidity to the mortgage market," Heagy said. By selling the mortgages, Dollar and other lenders don't have to wait 30 years for consumers to pay off a mortgage loan. The lender gets that money from Fannie or Freddie up front -- enabling the lender to turn around and write more mortgages... The two enterprises provide the main grease behind the nation's home mortgage industry. Together, the wholesale lenders own or back some $5 trillion in home mortgages, or roughly half those in the United States. (from here)

• They did this well, buying prime mortgages, packaging them into MBSs (Mortgage Backed Securities) and then selling them to investors such as pension funds and investment banks.
• Around 2004, the game changed due to pressure from two sources:

1. The US Congress started pushing Fannie and Freddie to loosen their lending standards to expand home-ownership for low-income and minority constituents.
2. Wall Street investment banks started pushing Fannie and Freddie to buy lower-quality (higher risk in terms of lesser creditworthiness and the other well-documented shenanigans such as no verification of income or assets) mortgages.

• Fannie and Freddie did that and all was well while the house prices kept going up. When they stopped going up and homeowners started defaulting on mortgages, the show came to a close.