Almost like white knights riding out in the storm, Fannie Mae and Freddie Mac are filling the void left by private investors no longer willing to buy mortgages until this mortgage mess is clearly defined and cleaned up. Not too long ago, many were calling for their heads and declaring that the mortgage market would be better off if these government-sponsored entities were restricted from further growth. Fannie and Freddie were also under investigation for accounting violations and fined by federal regulators.
But now everyone is glad they're alive and well and helping to ease the pain from the growing mortgage crisis. Even Countrywide (NYSE: CFC) is looking to them as its savior. According to the Wall Street Journal, 80% of all new loans [subscription required] being made by Countrywide are eligible for sale to Fannie or Freddie, which is up from about one-third last year.
What's the difference? Fannie and Freddie have much stricter guidelines lenders must follow before they'll buy a mortgage. Borrowers must prove their income and they must make a down payment of at least 10% or 20%. All those creative mortgages the private markets invented in the early 2000s -- no interest loans, no downpayments, no documentation, option ARMs and other innovations -- could not be sold to Fannie or Freddie. Those creative lending practices produced the loans at the heart of this mortgage mess.
Why is it so important that the new loans get the blessing of Freddie or Fannie? Well, because of their stricter guidelines investors are more comfortable buying the mortgage securities packaged by Freddie and Fannie. Freddie and Fannie guarantee that payments will be made and collect fees for those guarantees. Because they are government-chartered entities, the market assumes the government will step in and shore them up if Freddie or Fannie were not able to provide those guarantees. In 2005 Fannie's and Freddie's marketshare had dropped to just 41% of U.S. mortgage securities offered to investors, the Journal reports that their share rebounded to 72% in October, according to the trade publication Inside Mortgage Finance.
Now the big question left open is should Fannie's and Freddie's role be expanded? Federal Reserve Chairman Ben Bernanke thinks it should. Right now Fannie and Freddie can only buy and guarantee repayment of mortgages up to $417,000. Bernanke wants that cap raised and Senate Finance Committee Chairman Charles Schumer agrees and may soon offer up legislation to do so. The government should tread very carefully before guaranteeing taxpayers dollars. With the median average sales price nationwide at $211,700, who are they actually protecting above the $417,000 guarantees? While some areas of the country do have higher median average sales prices, the new government guarantees should not be raised significantly. Taxpayers have enough exposure to the shaky mortgage market now.
Lita Epstein has written over 20 books including "The 250 Questions You Should Ask to Avoid Foreclosure" and the "Complete Idiot's Guide to the Federal Reserve.
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Reader Comments (Page 1 of 1)
11-13-2007 @ 10:09AM
Jane Goodie said...
Who’s going to help the people who lost everything they had? The working poor were the ones who had the American dream pulled out from underneath them by loosing their houses. The world could hardly seem like a fair place to them. It does seem like powerful people are no longer accountable, though. For example, you lose money on Wall Street as a big-time CEO and you get fired. This is ultimately why O’Neal lost his job. Merrill’s board members, whom the NewsVisual article http://www.newsvisual.com/newsvisual/2007/10/who-should-repl.html identifies, needed to replace O’Neal because he lost huge sums of money. Nevertheless, Mr. O’Neal still leaves as a wealthy man.
11-13-2007 @ 10:46AM
Warren said...
"Who’s going to help the people who lost everything they had? The working poor were the ones who had the American dream pulled out from underneath them by loosing their houses."
Maybe it's also time for a little personal responsibility. Anyone could see those loans weren't smart. Most people went in with their eyes wide open.
Yes, it's tragic when people lose their homes, but it's really not fair to blame anyone else but themselves for it. Personal responsibility. It's becoming more and more rare every day.
11-13-2007 @ 10:53AM
Lita Epstein said...
Warren,
Unfortunately in this country financial literacy is not taught in the schools. I suspect many poor people now losing their homes got caught up in mortgages schemes whose loan provisions they didn't fully understand.
The Federal Reserve and others do need to clean up some of the scams that caused these problems as I discussed in this post: http://www.bloggingstocks.com/2007/11/06/feds-finally-giving-clues-to-its-solutions-for-mortgage-mess/.
Lita
11-14-2007 @ 3:05PM
JIM DEAN said...
MY WIFE WAS EMPLOYED BY COUNTRYWIDE FOR FIVE YEARS AND AS A RESULT OF THE LOOSE LENDING GUIDELINES PRACTICED BY THIS COMPANY WHICH CAUSED THIS FINANCIAL MESS SHE WAS LAID OFF ALONG WITH THE SO MANY OTHERS. SOME OF THE LOAN PROGRAMS THEY OFFERED WERE THAT IF YOU COULD WALK AND CHEW GUM AT THE SAME TIME, YOU GOT THE KEYS. DESIGNED TO FAIL ! WHO IS GOING TO BE HELD ACCOUNTABLE ?
11-15-2007 @ 5:43AM
Carson said...
Bernanke’s speech this morning would have been pretty funny if it wasn’t just so laughable.
Imagine someone from the Federal Reserve making a speech about how open they are to cover for the underhandedness.
They remind me of the sort of people you come across in business that figure all of the money coming in is their half of the business and any thing that is a cost that needs to be covered is your half.
They are pretty much like our personal credit cards are to us except they are for the government and the banks. One difference is that we get an accounting at the end of the month. I heard Congress tried to get an accounting and they couldn’t.
It looks like we’re headed for hard times and the government is going to do everything wrong it did in the Depression in the thirties that made it drag out longer then necessary, plus they won’t stop until they top it off with a cherry.