So why did Fannie and Freddie go into conservatorship? What happened to the toxic mortgages?
Mortgage-backed security:
http://en.wikipedia.org/wiki/Mortgage-backed_security
“First, mortgage loans are purchased from banks, mortgage companies, and other originators. Then, these loans are assembled into pools. This is done by government agencies, government-sponsored enterprises, and private entities, which may offer features to mitigate the risk of default associated with these mortgages. Mortgage-backed securities represent claims on the principal and payments on the loans in the pool, through a process known as Securitization. These securities are usually sold as bonds, but financial innovation has created a variety of securities that derive their ultimate value from mortgage pools.
Most MBS’s are issued by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), U.S. government-sponsored enterprises. Ginnie Mae, backed by the full faith and credit of the U.S. government, guarantees that investors receive timely payments. Fannie Mae and Freddie Mac also provide certain guarantees and, while not backed by the full faith and credit of the U.S. government, have special authority to borrow from the U.S. Treasury. Some private institutions, such as brokerage firms, banks, and homebuilders, also securitize mortgages, known as “private-label” mortgage securities.”
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis
Subprime mortgage crisis
“In 1995, the GSEs like Fannie Mae began receiving government tax incentives for purchasing mortgage backed securities which included loans to low income borrowers. Thus began the involvement of the Fannie Mae and Freddie Mac with the subprime market.[106] In 1996, HUD set a goal for Fannie Mae and Freddie Mac that at least 42% of the mortgages they purchase be issued to borrowers whose household income was below the median in their area. This target was increased to 50% in 2000 and 52% in 2005.[107] From 2002 to 2006, as the U.S. subprime market grew 292% over previous years, Fannie Mae and Freddie Mac combined purchases of subprime securities rose from $38 billion to around $175 billion per year before dropping to $90 billion per year, which included $350 billion of Alt-A securities. Fannie Mae had stopped buying Alt-A products in the early 1990s because of the high risk of default. By 2008, the Fannie Mae and Freddie Mac owned, either directly or through mortgage pools they sponsored, $5.1 trillion in residential mortgages, about half the total U.S. mortgage market.[108] The GSE have always been highly leveraged, their net worth as of 30 June 2008 being a mere US$114 billion.[109] When concerns arose in September 2008 regarding the ability of the GSE to make good on their guarantees, the Federal government was forced to place the companies into a conservatorship, effectively nationalizing them at the taxpayers’ expense.”
They went into conservatorship because the collapse of the housing bubble left them with 15 billion dollars of bad debt on their books. The Bush administration decided to bail them out in order to keep the secondary market for housing debt from ceasing to function. Their non-performing loans are probably now on the Federal Reserve’s books.
I don’t believe that Fannie and Freddie were the largest dealers in securitized mortgage debt during the years of the bubble. The investment banks had entered the field in a huge way offering much looser credit terms to the public than either Fannie or Freddie.
There is a difference between toxic mortgages and non-performing loans. Toxic paper includes stated income stated asset loans, option ARMs and other exotic non-conforming loans, none of which Fannie and Freddie dealt in. Again, you need more information that you are getting from brief articles on Wikipedia.