Fannie Mae and Freddie Mac are two major mortgage lending companies in the United States. Both these large scale companies have lent out about $5.3 trillion dollars in mortgages. The companies lend other banks and financial institutions money so that the other banks can make new loans to businesses, potential homeowners, and other people looking to borrow money. By lending out all of this new money to other financial institutions the companies are potentially helping increase the economy.

Freddie Mac lent out a plethora of money to major financial institutions that were risky institutions to trust to pay back. If a company knows that they are lending money out, and they know that they may never see the money again, it is considered to be very risky. This set’s mortgage lending companies up for disaster.

Being an accounting student I have learned that as an auditor you must possess the trait of professional skepticism. Professional Skepticism is an attitude that an auditor must maintain, which includes having a questioning and critical mind when going through accounting records. The accounting methods that were used by both companies were not in any violation of the accounting rules, but from the view of an accountant with professional skepticism, they may have been considered unethical.

Freddie Mac took the losses that they have incurred from lending money to financial institutions that were unable to pay back the money that they owed, and “pushed losses into the future.₁” By not stating their loss of money in the period that they have incurred them in, and spreading them out to later periods, they are keeping the public from seeing the true rapid decrease in capital. Both mortgage lending companies claimed to have deferred tax asset credits, that they have built up and saved over the years. They took these credits and inflated their financial statements with them by increasing their capital. Freddie Mac increased their capital by $28 billion, whereas Fannie Mae increased their capital by an astounding $36 billion.

As of Sunday September 7th, 2008 the United States Treasury Department bought the two companies, and will now regulate them. It will to cost the treasury department approximately over $10 billion to try and bring these companies back to a level that the public will respect them. The treasury department hopes that this take over will help to stabilize the stock market from its downward spiral, and help keep loans and the money borrow system “credit worthy₁” to the public.

For starters, the Top Executives of both companies will be removed and no longer be in charge. Any dividends that will be handed out by either Fannie Mae or Freddie Mac will first go to the preferred share stock holders, who are expected to receive little or no money. Therefore the common stock holders, who only receive dividends after the preferred stock holders, will be left with no profits from either of the two companies. Debt holder’s that Fannie Mae and Freddie Mac have issued to, which includes many foreign central banks, are projected to receive money and be backed by the United States Government.

The United States has a history of providing financial relief to many corporations that are leaning towards a collapse. “If anybody thought we had a pure free market financial system they should think again.₂” If the government did not step in and intervene, than these major mortgage companies would be well on their way to bankruptcy. The reason that we have a treasury department is to help out when companies are in a financial crisis. The reason we do not have a totally free market financial system is because we need the government to be able to step in when major companies are in a crisis, so that we have stability even with the uncertainty. This may be the costliest rescue that the United States has seen so far, but the mortgage companies were in great need of this rescue to keep the mortgage and housing market afloat.