Between them they guarantee one in every two home loans in the US - a staggering mortgage liability of $5 trillion.

Over the past 12 months they have lost a combined $11 billion, taking America's housing market to the brink of implosion.

But who - or more specifically what - are Fannie Mae and Freddie Mac, the giants at the centre of 2008's financial meltdown?

The history of Fannie Mae and Freddie Mac

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The nickname of the Federal National Mortgage Association, Fannie Mae was established in 1938 as part of Franklin Roosevelt's New Deal.

As the US limped out of the Great Depression, the company was set up to kickstart the mortgage market and allow Americans to own their own homes.

Fannie Mae's role was to buy up mortgages and sell them on to investors, providing stability and liquidity for home loan firms.

As a result, the secondary mortgage market was created.

Within the secondary market, companies like Fannie Mae are able to borrow money from foreign and domestic investors at low interest rates because of the financial support that they receive from the US Government.

Fannie Mae makes a profit from the difference between the interest rates homeowners pay and foreign lenders charge.

Until 1968, Fannie Mae had a monopoly over the secondary mortgage market. But due to fiscal pressures created by the Vietnam War, President Lyndon B Johnson privatised the lender in order to remove it from the accounts. It then became know as a Governnment Sponsored Enterprise (GSE).

The Federal Home Loan Mortgage Corporation, known as Freddie Mac, also a GSE, was set up in 1970 to provide competition to Fannie Mae.

The American Dream

Providing reliable returns to shareholders, Fannie and Freddie dominated the secondary mortgage market from 1970, growing to the point where their combined assets were 45 per cent larger than those of the US' biggest bank Citigroup which has $2.2 trillion under management.

On its website Fannie Mae boasts that it has helped "55 million families achieve the American Dream" of home ownership.

A Chequered History

The history of Fannie and Freddie has not been without scandal. In 2003, an investigation by the Justice Department and the Secutiries Exchange Commission into Freddie Mac's accounting practices revealed errors of $4.5 billion. Three top executives were forced to quit as a result of the crisis.

But 2008 has been the worst of years for the pair. Shareholders have already lost 74 per cent of their investment this year on escalating concern that Fannie and Freddie don’t have enough capital to weather the subprime debacle. The market has become steadily more concerned amid mounting bad debts and corporte collapses.

To ensure their survivial, the US Government this week proposed plans to inject billions of dollars of taxpayers’ money into the companies, if necessary, by buying newly issued stock.

It was not charity. If Fannie and Freddie are unable to borrow, they will not be able to buy mortgages from commercial lenders, making it more expensive and difficult for home buyers to obtain credit and likely bringing the entire housing market to its knees.

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