Government intervention tries to fix national mortgage crisis
One of the most important economic events of the last 100 years has just happened. Fannie Mae and Freddie Mac are now under the control of our government. What does this mean? Let’s break down the entire situation to get a better look at what happened and where we go from here.
Fannie Mae is a nickname for the Federal National Mortgage Association and Freddie Mac is short for Federal Home Loan Mortgage Corporation. Before the weekend, both Fannie and Freddie were private companies that sold shares to investors, just like any other publicly-traded corporation such as Wal-Mart. The way these two companies make money is to buy loans from banks and package them into a pool of loans.
What does this mean? The typical home loan that the average person like John Smith gets at his local bank is often sold to one of these entities. While John still receives monthly statements from his bank, the loan is actually sold to either Fannie or Freddie. John has no clue and it does not affect his monthly routines. He continues to write his mortgage payment to his local bank. He is one of millions of loans that enter these new pools of loans created by the firms.
These pools of loans are then packaged and sold to investors, who collect returns based on interest payments as well as principal payments on mortgages. According to most recent estimations, the two companies own or guarantee payments on over $5.4 trillion in mortgages. This sum represents roughly half of all the mortgages in the United States.
The past 18 months we have all seen the housing market struggle. Home prices are down, inventories are up and foreclosure is now a word that everyone knows. With the ever-increasing foreclosure problems, Fannie Mae and Freddie Mac have begun to have extreme liquidity issues. The two firms have lost a combined $12 billion since last summer alone.
After days of speculation, the federal government took over the two companies on Sept. 7. In addition to removing the two CEOs, the government has pledged up to $200 billion to help back these two entities. Strict parameters have been set up with the idea that by 2010, the two entities will begin to lighten up their mortgage lending by as much as 10 percent a year, eventually settling at $250 billion each.
So now we know what the two companies are and what has happened. The next question is what the future holds, both in the short and long term for not only Fannie and Freddie, but for the housing market and our economy as well.
In the short term, we can expect mortgage rates to fall. In fact, it only took three days for the average 30-year fixed-rate loan to drop roughly 0.4 percent to 5.79 percent. These mortgage rates will save new borrowers more than $400 in interest payments per year for every $100,000 in loans.
The goal of the government takeover is to bring long-term stability to the housing market and the lowering of rates will make obtaining mortgages easier. There are still strict hurdles an individual must overcome to secure home financing, which is something I will continue with next time.
Geoff Zahler is a columnist for The Nevada Sagebrush. He can be reached at gzahler@nevadasagebrush.com.
This entry was posted
on Monday, September 15th, 2008 at 10:06 pm and is filed under Perspectives.
You can follow any responses to this entry through the RSS 2.0 feed.
You can leave a response, or trackback from your own site.
Print this post
Email this post© 2008 The Nevada Sagebrush
