[JayBee]

Originally Posted by Lightemup

7. Paulson says Fannie Mae and Freddie Mac are "essential" because they represent the only "functioning" part of the home loan market. The firms own or guarantee about half of the $12 trillion in U.S. mortgages. Is it possible to have a sound banking system when the only "functioning" part of the mortgage market is insolvent?

Unfortunately, this is largely true, since most lending entitities won't lend money to a housebuyer unless they know they can pass the buck to Fannie or Freddie. If there were only portfolio lenders in the market, of which there have never been many in recent years, they don't have enough money to satifsy the demand for loans, even in this very slow real estate market.

Take Freddie and Fannie out of the picture and the supply/demand curve for the portfolio money gets extremely steep. Loans, which are not easy to get now, would become extremely hard to get, rates would go up, and the lenders would basically just be cherry-picking the borrowers. That is a recipe for total disaster in an already weak market. It would cause property values to dive.