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Whenever something is out of place at our house, our female cocker spaniel Lucy (also known as “Lucifer” for good reason) is assumed to be guilty. There’s a good chance that where there’s trouble you’ll find Lucy and the explanation for whatever mess is left behind. This “splain’n” phrase came to mind following recent economic events.

There’s some splain’n to do following the recent Fannie/Freddie takeover. Lets start by splain’n who the heck Fannie and Freddie are and why you should care.

I still think of Fannie May chocolate when I hear the phrase, but for our purposes, “Fannie Mae” is short-hand for Federal National Mortgage Association (FNMA) and “Freddie Mac” is the Federal Home Loan Mortgage Corporation (FHLMC).

During the weekend of Sept. 6, the Federal Government forced Fannie Mae and Freddie Mac into conservatorship, which is not to be confused with receivership (forced liquidation), and extended direct support to the Federal Home Loan Banks.

To make sure I was crystal clear on the definition and implications of conservatorship, I checked the dictionary and found the following:

1. A person in charge of maintaining or restoring valuable items, as in a museum or library.

2. One that conserves or preserves from injury, violation or infraction; a protector.

3. One that is responsible for the person and property of an incompetent.

The U.S. Treasury has pledged $2 billion in emergency financing to each of these mortgage backed security companies.

This is the way I explain mortgage backed securities to investors; let’s say that you find a home you’d like to purchase and you go to the bank for a loan. After qualifying for the loan you sign a loan agreement and agree to make payments of principal and interest to the financial institution in return for the cash it lent you to purchase the home.

The bank has lent you money figuratively from their vault and now needs to replenish with new funds. This is accomplished by selling a mortgage security, which is created when multiple loans are packaged or “pooled” by issuers for sale to investors. As the underlying mortgage loans are paid off by the homeowners (you), the investors receive payments of interest and principal.

Individual investors can buy mortgage securities when they’re issued or afterward in the secondary market. Investments in mortgage securities are typically made by large institutions when the securities are issued. These securities may ultimately be redistributed by dealers in the secondary market. Mortgage securities may be pooled again to create collateral for a more complex type of mortgage security known as a Collateralized Mortgage Obligation (CMO), or since 1986, as a Real Estate Mortgage Investment Conduit (REMIC).

The reason this is important to us is that mortgage securities play a crucial role in the availability and cost of housing in the U.S. and in this day and age much attention is focused on this area of financial markets for good reason. Pass-through (passing through of principal and interest back to the investor as the mortgages are paid off) mortgage security’s were first issued in 1970 with a guarantee by Ginnie Mae (Government National Mortgage Association) which is a government-owned corporation within the Department of Housing and Urban Development.

By selling these packaged and pooled investments to government sponsored enterprises (GSE’s) the banks replenish their coffers and on and on it goes — where she stops nobody knows. As of Sept. 8 the government has taken over management of Fannie and Freddie thereby providing capital that wasn’t available through private markets.

At this time the government is simply taking management control. The decision was made to address safety and soundness concerns, enhancing mortgage liquidity and reducing financial market uncertainty. There are a number of unanswered questions, such as what will eventually happen to the shareholders and whether the government’s authority, which runs through 2009, will be extended. In the short-term, mortgage rates should decline and Treasury yields are likely to rise.

Don’t be alarmed if you’re confused and if not, congratulations. Given the market’s substantial fluctuations and equally substantial uncertainty about the future, what’s a girl to do? At the risk of restating the obvious, to succeed in this highly volatile market, I believe the best course is to look beyond the short-term, albeit sometimes dramatic, swings in economic data and focus instead on the future.

Ultimately, the more successful path is to develop a long-term strategy designed to achieve your financial objectives — and maintain it despite the ups and downs of often irrational financial markets. As Bill Gross famously said, if the Treasury wants investors to buy the U.S. mortgage market, they have to “swim in the pool, not just be a lifeguard.”

If you have any questions or concerns about your portfolio, your investment strategy or any other aspects of your financial life, please don’t hesitate to call me.

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Darcie Guerin is a financial adviser and branch manager at Raymond James & Associates Inc. at 606 Bald Eagle Drive, suite 401, Marco Island. Contact her at Darcie.Guerin@raymondjames.com, 389-1041 or toll-free (866) 343-0882.