Fannie, Freddie, and you — a Q&A session
July 17, 2008The headlines are hard to miss… “Stock Prices Fall for Fannie Mae and Freddie Mac,” “Freddie Mac is under Attack,” “Fannie and Freddie’s Extreme Makeover,” … big question, what does this mean for you? Let’s take a look at the who, what, when, where, and why of these two institutions.
What are Fannie Mae and Freddie Mac? – Fannie Mae was created by the US government as part of the New Deal during the Great Depression to provide liquidity for the mortgage market. Freddie Mac, which does the same thing, came about in the 70s.
What do they do? – Fannie and Freddie buy loans from banks. This creates liquidity for banks that is used to originate more loans. This in turn keeps the lending world running smoothly, making it easier for people to buy homes.
What type of loans do they buy? Fannie and Freddie set the guidelines for conforming (prime) loans. These are loans in which the borrower’s credit is reviewed, income verified through pay stubs and/or tax returns, and assets verified through financial statements. These loans do not include the negative amortization, exotic interest-only ARMs, MTA loans, etc. that have plagued the lending and housing markets.
Should we blame Fannie and Freddie for the mess we are in? There is no real answer to this one. “No” because most of the problems being experienced now were the result of no-doc loans, MTA loans, etc. defaulting in large numbers. “Yes” because there is plenty of blame and finger pointing to go around. Even Fannie and Freddie’s guidelines were more lenient a few years ago than they are today, and perhaps 100% financing for any loan program isn’t the best idea in the world.
Why are their stock prices falling? The market is reacting dramatically to any news, and sometimes reactions don’t make a lot of sense. When the public hears news of subprime loans defaulting and banks going out of business or losing literally billions of dollars, the reaction is negative even toward entities that only invest in good, credible loans.
What could happen if Fannie and Freddie failed? The failure of Fannie and Freddie would be disastrous for the lending world, housing market, and the US and World economy. This is why the government plans to support both Fannie and Freddie to prevent them from collapsing.
A quick scenario might look something like this: Fannie and Freddie can no longer buy loans from banks… banks begin to run out of money to lend… it becomes harder for people (even well qualified borrowers) to buy homes… the housing market suffers even more… the housing slump continues its drag on the US economy… when the US economy suffers, so does world’s economy.
How would this directly affect you? Unless you are in the market to buy a home, it wouldn’t directly impact you. BUT the ripples of the collapse would be felt in the economy. A slow economy means less spending and investing… the demand for good and services is down, which results in layoffs and/or a decrease in income… people with reduced or no income are not out spending and investing… the cycle reverberates like feedback in a microphone.
Bottom line:
– Fannie and Freddie are essential to the lending and housing markets by purchasing conventional loans from banks to keep the markets running smoothly.
– Fannie and Freddie may be struggling, but it is not for the same reasons IndyMac and HomeBanc failed — the result of issuing bad loans.
– Some people may not like the government supporting Fannie and Freddie, but if they were to collapse, things would get a lot worse than they are now.
Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.
