Mortgage news......

The Mortgage Meltdown……

Last Friday after reading an article on Freddie/Fannie on the front page of the Orlando Sentinel, I asked a local Mortgage Consultant to give me a simplified interpretation, if possible, on what that article was saying. Last week the government was bailing them out and it sounds like now they are taking them over. The following is the explanation I received. I hope it gives you a better understanding to the change and helps you to understand why the mortgage giant's turmoil affects the economy and borrowers.

Mickey Carlton
Your Mortgage Consultant for Life
Thomas Mortgage
407-788-5100

“To understand what is happening, you have to understand the history. Fannie was created as a governmental agency back in the 30's. It was charged with making sure we could all get financing to buy houses. Lyndon Johnson effectively privatized it in the 60's. Freddie came along about that time. Since then, they have been referred to as "quasi-governmental" agencies. No one was ever really sure about the government’s willingness to “back” the two agencies. The assumption was that even though Fannie and Freddie were private companies, the government would not let them fail. The debate has been fierce as to whether the "government as last resort was true". Now, I guess we know.

Fannie and Freddie have private ownership and operate for a profit. However, this has irritated many politicians who have advocated reducing their size and power. They have had what some feel are unfair advantages such as being able to borrow at near-treasury department rates. This has put them in an advantageous position versus their banking competitors, thus creating even more irritation. They have also been incredibly strong lobbyist for measures that would further their best interests. As a result, many people in both the private and public sector have long been eager to see their size and influence reduced.

The reduction process has started. This year, both agencies are losing their reserves and seem in danger of running out of money. They have been unable to raise new capital. Foreign governments (China, Japan, Mexico, to name three) who have bought Fannie and Freddie bonds (packaged loans) have been complaining to US treasury officials because they fear massive defaults.

So, the treasury has said, enough is enough. They are stepping in and, in effect, nationalizing both companies. The CEO's are being forced to leave, thus joining the hundreds of thousands of processors, receptionists, coordinators and underwriters who have lost their jobs to this housing debacle. The Board of Directors of both companies are being dismissed. The stockholders are going to walk away with nothing, or next to nothing. The government is going to inject the money to maintain the organization's integrity. By doing so, the government is saying, "if we are putting up the money, then we are going to run it".

The supposition is that mortgage money will stay relatively cheap since the government can simply put more tax money into the till, if necessary. This will come at the expense of people like you and me who pay taxes. It is a rather dramatic bailout of the companies who financed the housing boom.

No one really knows what form the new entity will take. Will it be one big governmental agency? Will they maintain both firms? Professionally, I wonder about the underwriting software and loan guidelines. Currently, there are certain things we can do with one agency that the other does not allow. They both have areas of tolerance that the other does not favor. Lenders like me use these subtle differences when we decide whether to send a loan to a bank "that sells to Fannie" or one "that sells to Freddie". As a lender, there are certain technical issues that will have to be addressed. No one knows how it will play out.

Near term, interest rates are expected to go lower and that scenario did take place on the day the takeover was effective. This operation is an effort by the treasury to stall off the higher rates that would most certainly have ensued if big bond buyers (pension funds, college endowment funds, life insurance companies, foreign treasuries, huge corporations, etc.) had decided to pull their money. Perhaps the big investors will keep throwing money into the fray, knowing that they have the full taxing power of the US government at their back. This should, theoretically, bring mortgage rates down.

So, the initial call is for lower, or at least stable rates. We can also presume that certain procedural changes will occur. At this point, there is very little precedent in the residential mortgage business for what is happening. It will be interesting to observe how this plays out.

** The article posted above is expressly opinions of the Mortgage Consultant and the blog Author, Please enjoy reading and ask permission to use any information on this site. Thank you and have a great day !**