Federal officials announced today that Fannie Mae and Freddie Mac have been placed into "conservatorship" and will be overseen by the Federal Housing Finance Agency. This takeover means that the government will temporarily run Fannie and Freddie until they are able to recover. Both agencies will be open for business Monday, but many changes will occur including in their management. "We examined all options available, and determined that this comprehensive and complementary set of actions best meets our three objectives of market stability, mortgage availability and taxpayer protection," US Treasury Secretary Paulson said.
Fannie and Freddie play a central role in the market for home mortgages by purchasing loans from banks, packaging them into bonds and selling them to investors. Because they attach a guarantee to these securities, they have become the main source of mortgage funds as investors have become more cautious of buying mortgage backed bonds. They have helped stabilize the housing market by continuing to purchase loans, although with increased costs and standards.
Although the media will focus on the government takeover of Fannie Mae and Freddie Mac, several changes were already in the works for conforming loans. Because of large losses in the last year, Fannie Mae had announced it would increase its fees and stop buying certain high risk loans on October 1st. The new fees include an across-the-board fee on all loans and other fees based on credit scores and down payments. This will of course affect borrowers with lower credit scores and down payments more. The added fees will likely add ~.25% to the interest rates on most conforming loans as banks passed them on to borrowers.
Fannie Mae is also planning to stop purchasing Alt-A loans by the end of the year. Alt-A loans were a category between prime loans and sub-prime loans for borrowers with excellent credit and down payment that could not fully document their income and assets. These loans were intended for self-employed or commissioned employees with hard to document income sources.
The government will of course be cautious and may impose new restrictions on loan programs and fees to ensure that the organizations will survive. The cost of the government intervention to taxpayers is unclear, as it will depend in the way the rescue is structured, how high mortgage default rates get and when the market finally stabilizes. It is likely that it will run into the billions and could take several years to complete. Ending on a positive note, if this move does restore confidence in the mortgage lending it could help to stabilize the market and result in lower interest rates.
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Roland Carrillo, PhD
Branch Manager
VanDyk Mortgage in Cary, NC
Email: rjcarrillo@gmail.com
Website: http://www.mymortgageanalysis.com/
Our branch specializes in affordable lending options including FHA / VA and the Community Heros program. As both a banker and a broker, you have access to a full menu of products including all Fannie Mae and Freddie Mac Conforming loans, Reverse, Jumbo and Commercial financing on a variety of property types. We are located in Cary, North Carolina and are within easy reach of the entire RTP Area including Wake, Durham and Orange Counties.
Thanks for the update. I guess it is too early to assume anything is really going to change in the near future. But a good question "when does it all get better?" And what affect will this have on us agents (loans and real estate).
Saw the headlines yesterday but hadn't read the articles yet. Thanks for giving us the lowdown.
We'll see what this means to the housing market. I'm always a little skeptical about the government "helping" by taking over something.
Rosemary - It is too early to assume anything. The interest rates did decrease today as there is more confidence in the mortgage backed securities from Fannie/Freddie (after all they are now backed by the US Government) but it is unknown if this will continue. There have been no changes announced to guidelines, so for right now it is a positive affect. Long term it could stabalize the market or it could just lead to an increase in taxes and cut in services as the US government has to pump more money into the housing market.
Linda- I am skeptical as well. They seem to have good intentions, but those don't always lead to good results. It could be a few months or years before we can really look back and judge.
Overall, it is always hard to call a bottom. Especially since real estate is a local issue. Some markets might still be over valued and have far to fall, others might already be in recovery.
Most of changes are going to happen in the next couple of weeks. You should check out NAHREP and find out how this is going to happen. They all will be out our National Conference in Phoenix to discuss these issues.