Mortgage Confidential: Fannie and Freddie, What's Up With These Guys?
Filed under: Real Estate, Mortgage Confidential
Mortgage expert David Reed invites WalletPop readers to ask him questions about real estate financing. Leave your questions in the comment section of this post.
Fannie Mae is the nickname given to the Federal National Mortgage Association (FNMA). First established as a government agency in 1938 by Franklin D. Roosevelt then later re-chartered in 1968 as a publicly traded and government sponsored enterprise. Fannie's job is to provide liquidity in the mortgage market. Freddie Mac, or the Federal Home Loan Corporation (FHMLC) was created in 1970 as a government sponsored private entity just like Fannie Mae with a similar mission, to provide liquidity and add stability in the housing market using private funds.
So how do they do that? How do they provide liquidity and stability in the mortgage market? Let's first look at liquidity and why that's important. When a mortgage company wants to make a home loan it can do so from it's vault of cash or it can be issued from the lender's credit line it has established for the sole purpose of making home loans. Let's say a lender has $100 million in available funds to place mortgages. Now let's say that same lender was successful in its endeavor and lent out everything it had. Zero bank balance. Okay, they've got a lot of real estate in their portfolio but they've run out of cash. Remember, they call lenders "lenders" for a reason, if there's no money to lend, they won't be lenders for very much longer. So what to do?
The mortgage company sells the mortgages they own to Fannie Mae or Freddie Mac, as long as those loans meet the underwriting requirements previously set by Fannie and Freddie. Fannie and Freddie now own the notes and collect the interest on those loans while the mortgage company now has replenished its credit line and is back in the lending business.
Next, stability. By establishing universal guidelines, mortgages become some sort of a commodity, which can be bought and sold to not only Fannie or Freddie but to other lending institutions. Lenders can sell loans individually or lenders can package them up and sell mortgages in bulk. Having a universal lending standards that lenders adhere to provides a stable platform and cash when needed to mortgage companies across the United States.
But Fannie and Freddie aren't making headlines today because of their "stability." Because these institutions are publicly traded they can issue stock to raise cash when they need it. But paranoia has crept in and Fannie and Freddie's stock has gotten hammered. Now there are questions that wonder if either have enough money on hand to cover losses through bad real estate loans. When the stock price is high, either can sell shares and raise cash, but if the stock is trading low, as it is now, simply selling stock (to those who would buy it) might not be enough.
That's why the Fed stepped in and allowed for either Fannie or Freddie to borrow money from the Fed in the same fashion banks do when they need some extra cash. If Fannie or Freddie fail, the entire real estate industry would come to a complete halt. Beaten with a Tonya Harding crow bar. Okay, it would only come to a complete halt for those who needed a home loan and couldn't pay cash for a new house.
What is being overlooked in all this is that our current mortgage "crisis" was caused not by lenders who made mortgage loans using Fannie and Freddie guidelines but by those in the sub prime and alternative markets. It was these two types of mortgage loans, rife with fraud and loose credit guidelines, that started this whole mess. Fannie Mae and Freddie Mac are not sub prime lenders, alternative lenders. Yes, they had some similar product, a very small part of their portfolio of loans, but nothing near what was being laid out by the now-defunct sub prime industry.
Lenders like to see their borrowers have unique things that subprime or alternative lenders didn't require such as a job, a paycheck, a down payment and decent credit. If Fannie and Freddie were awash in bad-credit, no income mortgages I'd be concerned but since they don't, I'm not.
The Fed did a good thing if only to let the world know that Fannie and Freddie are here to stay. This will all wash out and investors will find that these two government sponsored corporations are solid again. Once that happens, I think our little "mortgage mess" will soon be viewed in the rear view mirror.
Real estate finance expert David Reed is president of CD REED Mortgage Bankers in Austin, TX and author of Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You and Mortgages 101: Quick Answers to over 250 Critical Questions About Your Home Loan.
Reader Comments (Page 1 of 1)
7-15-2008 @ 10:39AM
Ruth said...
I am in the Real Estate business, when do you anticipate the market turning?
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7-15-2008 @ 4:53PM
Joseph Sardina said...
I bet it won't rebound for 3-5 yrs, especially in investiment real estate. Now's the time to get the best refinancing rates you can get, for what you owe, and hunker down for a continued downslide of property values. Where there is uncertainty in the future, therein lies stagnation. With foreclosures hitting the market in record numbers, the inventory of what there will be for sale is f ar outstripping demand. To sel reall estate will take considerably more thrown in to sweeten the pot from a seller's point of view, than in times past. Now's the time to be creative when marketing, before heating costs soon become another unpleasant factor in owning rental units. I have several properties on the market for about two years now, and am trying to position myself for a long cold winter if my multi-unit and farmhouse don't sell pretty soon. On the other hand, If you have some cash, and borrowing power, and can look at a 5-10 yr horizon, I bet there's some pretty sweet deals out there right now. I've heard that Uncle Sam has considered a tax credit for those who purchase a foreclosed property in 2008. Any idea if that's true?
7-16-2008 @ 11:28AM
NORMA said...
I WISH I KNEW SO I COULD SELL MY PLACE AND GET A DECENT PRICE FOR IT. BUT GUESS I AM STUCK WITH IT AS LONG AS I CAN MAKE THE BIG PAYMENTS.
7-15-2008 @ 10:34AM
amey said...
the stocks are really tanking today again. Wall street must not be convinced these firms are here to stay.
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7-15-2008 @ 10:53AM
David said...
Nationally? Since national sales figures are dominated by concentrated, highly populated areas such as California and Florida, I would imagine that it would take another year for the market to stabilize. There are areas outside of these metropolitan areas that are doing quite nicely that didn't get caught up in the housing bust.
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7-15-2008 @ 5:34PM
David said...
My understanding is there is a foreclosure purchase tax credit but the bill is still being worked on, I believe the bill will be signed this week, at least that's what I heard.
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7-15-2008 @ 5:38PM
Speaking From Experience said...
Fannie Mae might not be awash in bad credit loans but they have certainly made their share of them. I've been in this business for 30+ years with the last 15 spent underwriting loans and I can tell you first hand Fannie Mae is a SUBPRIME lender. I think it safe to call hight LTV loans with credit scores in the low 500's and even a few that dipped into the 400 range a subprime lender. As if that's not bad enough, how about borrowers with thousands and thousands of dollars worth of unpaid collections,little or no reserves,housing debt increasing 3,4,5 or more times their current housing debt,lack of job stability,not one dime invested towards the purchase price and an overall debt ratio of 65%. Well that was a common occurance with Fannie Mae Desktop Underwriter approvals starting back in 2004. Oh did I fail to mention, verification of rental history, a major factor in determining how a borrower will handle their mortgage debt, is NOT required.
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7-15-2008 @ 5:50PM
David said...
I agree with you, but I do not recall any DU nor LP decision with scores in the 400s, ratios in the 65s, no money down with unpaid collections and no verification of rent.
Too many layers of risk. Whenever there was a high debt ratio it was offset by a greater equity position or if credit scores were in the 500's then that factor would be offset with more down payment or lower ratios, but never a combination of those. I recall the lowest conventional credit score I got approved was a 580 but the borrower had a 60 LTV. When I tried to pull additional cash out and increase the loan amount I wouldn't get an approval. At least that's my experience. I'm not talking about Expanded Approvals, either, perhaps you are but I don't think so.
Fannie and Freddie both approved loans that raised the eyeballs, mine included, of underwriters everywhere but we found that one or sometimes even two risk layers weren't enough to deny a loan.
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7-16-2008 @ 4:24PM
John said...
I am in the appraiser. Where do you think the appraisal will come from as of Jan. 2009. Management companies? Should i continue to market mortgage brokers or should i be focusing on the banks? Will management companies be a good source to recieve work even if they are reduced fees?
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7-16-2008 @ 8:50PM
Pam said...
I used to be a loan officer and I have to agree Speaking from experience, Fannie and Freddie were more of subprime than anything else. I have done loans for customers with scores below 580, quite a few of them. I had one customer that only had to come to the table with $187.00, lol. Unbelievable!!!!!! And they were also paying for the customer's appraisal too. And yes that is why they are tumbling now for all those loans. if they were like the banks were, well I have done quite a few subprime loans with banks too so maybe I shouldn't use them as an example. But I truly feel if banks didn't shift to the subprime lending, they would be okay now because you had to have at least a 20% down payment and good credit. Just my thoughts on this issue.
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7-22-2008 @ 1:02PM
mike said...
i am facing foreclosure. I got behind in my mortage payments
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7-24-2008 @ 2:04PM
Alex said...
I have a question about Mr Reed's commentary. If Fannie & Freddie were not "awashed" in subrime loans, why did they feel the crunch like the institutions that were? How much "bad paper" were they holding that caused them to almost go out of business? I heard their portfolio consisted of about 1% of sub-prime loans 1%, but that doesn't explain their huge losses. Are agancy conforming borrowers defaulting on the same scale as sub-prime borrowers? Thanks.
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7-24-2008 @ 6:15PM
jeffery and Debbie Kozinski said...
My husband and i have lived in my mother in laws house
for about 5 years. Del Jeffs mom is putting it up for sale in the
fall, we are interested in purchasing it. My husband has a
VA loan and dont know where to begin with it. Jeff and i
did file bankrupcy 8 years ago and that was not a wise
choice. We can not go back in time, we would like some
advise if possible.
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7-29-2008 @ 1:37PM
Whatever..... said...
My husband and I got caught up in this mess, now we are on the verge of losing our home. The lender, American Home Mortgae refuses to give us a loan modification even though we are in good standing and have very secure jobs. We were told we "sold our souls to the devil" Now I believe it..... We're totally screwed,,,,,
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8-21-2008 @ 4:31PM
gerard canavan said...
Question:
if the fed takes over fannie mae and freddie mac will mortgage interest rates go down?(or up?)
I will be looking for a small (150,000-175,000K) fixed, 15 yr mortgage, on new construction of a home worth $715,000. around the end of September (closing date approx 12/1/08).
I have an excellent credit rating.
thanks
Reply