Good morning, Netizens…
Now that the Feds have taken over the mortgage giants Fannie Mae and Freddie Mac, the question that seems foremost in everyone’s mind is how does this affect me? The move of the Feds assuming control of both Fanny and Freddie has no precedent in history that I have been able to find, and most of the business-side sources one would normally turn to to ascertain the meaning of this all cannot tell us the ramifications of the move, either.
So first, what happened here, and why? In order to provide capital to banks that lend money to aspiring homeowners, Fannie and Freddie need to be able to sell the mortgages, packaged as securities, to investors around the world once the two companies have bought the loans from the banks.
All this worked fine until foreign investors got nervous about the housing market simply because there were a lot of borrowers who either didn’t qualify for a mortgage or houses which were badly over-priced. Once the sheer volume of foreclosed homes on the market reached the breaking point, where foreclosed homes were glutting the marketplace, Fannie and Freddie became less and less viable as a mortgage lender. Once that took place, the government thought it had no choice but to step in and take over.
What happens next?
MORTGAGE RATES: If you already have a fixed-interest mortgage rate nothing much will change. The possible exception being that taxpayers probably should become utterly irate because the we are now footing the bill for the mistakes of borrowers who got in over their fiscal heads and the lenders who let them borrow more money than their investment(s) were worth to begin with.
If you are buying a home or thinking of refinancing an existing mortgage, some thinking is that the takeover will help stabilize mortgage rates. This is largely dependent upon the rates that the lenders, in this case the Feds, charge banks. If the rates drop, the banks may pass those savings onto the borrowers by lowering the rates. Perhaps not.
HOME PRICES: With national unemployment rising, an economy that appears to be on the ropes, you might think things couldn’t get worse. Another factor which will weigh heavily on home prices are the sheer number of homes for sale, as people try to get out from under bad mortgages. There are lots of cases where lenders are putting homes on the market, having already foreclosed on them, but the houses are simply badly over-priced because of bad loans.
Several scholars have suggested that the Feds are simply not interested on foreclosing on a bunch of homes, and that perhaps new deals may be made where the Feds are willing to modify the original mortgages to make them more affordable. That would work for the consumer, but it seems highly speculative. If they bail out homeowners, someone will have to bring pressure to bear.
The big three of the mortgage industry, credit score requirements, loan-size-to-home-value and down payment requirements are all up for grabs. It remains to be seen whether any changes to these three will require Congressional interference, but do not count on any big changes until after the November elections.
Most of all, it is very unclear whether stockholders or investors in Fannie or Freddie will ever get a return on their investment(s). They may lose everything before this process evolves. The attitude I’ve read is the Feds are not going to feel compelled to maximize shareholder returns. Now that the taxpayers are paying the bills, they better not care. I do not want to subsidize foreign investors when our economy is dragging in the mud.
How about you? Do you think the Feds absorbing the debts of Fannie Mae and Freddie Mac is a good deal for consumers?