The troubled loans which both Fannie Mae and Freddie Mac currently own would be put into newly adopted government financial institutions referred to as "bad banks". These banks would be in charge of collecting as much of the outstanding balances on the troubled loans as possible. The planned result would be 2 revived financial institutions ready to conduct business with a "clean slate".
Fannie Mae is a Washington-based company which was created during the Great Depression by Congress in order to support the lending industry. The proposed overhaul would mark one of the largest reorganizations of the shattered home finance industry. Both Fannie Mae and Freddie Mac (located in McLean, Virginia) possess government charters that enable them to purchase home loans from banks and in turn, sell them to investors after being repackaged. The banks which sold the loans to both Freddie Mac and Fannie Mae can use the proceeds from the sale of those loans to offer more loans to more borrowers.
The market meltdown of last September revealed that a large portion of both the lending giants' holdings were in peril. Since then, the government has offered upwards of over one trillion dollars which included direct aid of eighty-five billion dollars to keep the mortgage market running through the two lenders.
The preliminary proposal is but one of several which are slated to be brought to the attention of the White House's National Economic Council and be discussed.
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