As Fannie and Freddie headlines dominate, if you find your self still scratching your head over what it’s all about (we were), here’s a primer, DIVA-style: short and snappy.

What happened?
Financial markets and investors shuddered as a New York Times story revealed the nation’s two largest mortgage supporters—Fannie Mae and Freddie Mac—were under “growing financial stress.” Last Sunday the U.S. Treasury was ready with $300 billion  to shore them up if needed. This gesture reassured the markets.

Why were they in trouble?
Think of this like a game of hot potato—when the music stops, the person holding the potato loses. In this case, the potato is debt.

Fannie and Freddie (these are nicknames) are mandated by Congress to make it easier for banks and lenders to make loans to home buyers. They do this by buying loans made by banks and taking on all associated risk if the loans aren’t paid back. The bank is off the hook and has the cash to make more loans (and money).

To cash flow themselves and make money, Fannie and Freddie bundle up the loans into different assets that they sell off to other financial institutions. But, and this is a big but, they also guarantee the underlying loans will be repaid. If they aren’t Fannie and Freddie, are left holding the hot potato.

If their risk exposure gets too big, they may not be able to buy loans from banks (their role), thus paralyzing the home loan market. The best explanation of their risk exposure and how it has ballooned is here in this NYT graphic.

Congress founded Fannie but it’s not a government entity
Congress chartered Fannie in 1938 as part of The New Deal to encourage banks to lend to borrowers who may have been considered credit risky. It went public in 1968, and Freddie (also public) launched in 1971 to keep Fannie from becoming a monopoly.

In an odd hybrid relationship, these two publicly held private corporations are government regulated and operate with the perception that the government will always have their backs, which in fact is not guaranteed. They have responsibility to the nation and also to make money for their shareholders, creating a tense dynamic.

The big picture
Together Fannie and Freddie own a staggering amount of mortgages—about $5 trillion. Over time their risk exposure has grown as the number of loans grew and the number of mortgage defaults skyrocketed. Fannie and Freddie say they are in good shape but in a rough patch. Just the chance, however, that these two entities could collapse sent the shudder—without them mortgage rates would spike and home prices, already off about 20% in the last year in many markets, could fall. Their like an important engine keeping the housing market rolling whose health is important to the stability of the markets. Problem is, they may have become too important and now you’ll probably see lots of politicians calling for more government oversight of these two giants.