Fannie and Freddie: Getting to know powerful pair

They are the engines behind a complex process of buying, bundling, slicing and selling mortgages that remains a mystery even to millions of Americans whose home debt passes through their hands.

They were set up by the federal government--Fannie in 1938, Freddie in 1970--to help more Americans buy and keep their homes. Today both are public companies, their stock traded on the open market.

But Fannie and Freddie don't deal directly with homeowners. Instead, they buy mortgages away from the banks that already hold them, providing cash that allows banks to make more home loans and take on more debt.

Then Fannie and Freddie bundle the loans together and sell pieces of the whole to investors as what are called mortgage-backed securities. They pay a guaranteed rate of return--like Treasury bonds, but more lucrative for investors.

While they have not carried the explicit backing of the federal government for decades (Fannie became private in 1968, while Freddie was set up that way), each has a $2.25 billion line of credit with the government.

And the implicit presence of Uncle Sam helped the pair grow fast.

As more and more Americans sought to buy homes, Fannie and Freddie's portfolios grew more than 10 times from 1991 to 2003. Today they hold or guarantee about $5 trillion in mortgage debt, nearly half of what's outstanding in the United States.

The two were immensely profitable even as the explosive growth in home values slowed, then home prices began to fall. Borrowers were stuck with payments they couldn't afford. Thus began a wave of foreclosures.

Fannie and Freddie were mostly unaffected by the subprime lending crisis that has grabbed so many headlines. But even foreclosures on more desirable mortgages took their toll.