As you have probably heard, there’s news regarding Fannie Mae (FNM) and Freddie Mac (FRE) everywhere we look today and over the weekend.
One fear is that a collapse of either would, in the long run, send mortgage rates up. More broadly, it would lead to the further deterioration in confidence in the U.S. financial system and threaten the overall U.S. economy.
In case you are not sure what they do, Fannie Mae and Freddie Mac are government-sponsored (not run) enterprises. They are shareholder-owned companies that buy mortgages, package them into securities and sell them to investors. The two companies also hold some mortgages in their own portfolios. Institutional investors like these securities because they pay higher yields than Treasury securities do. And because Fannie and Freddie guarantee timely interest and principal, investors in mortgage-backed securities know they'll be paid, even if borrowers default.
Fannie and Freddie combined have about $81 billion in capital — enough to cover 1.6% of the mortgages they insure. Both companies maintain fairly stringent requirements for the mortgages they buy. They don't touch subprime mortgages or many of the exotic types of loans that helped fuel the real estate bubble. But as the mortgage market has soured, even prime borrowers — the kinds of borrowers whose loans Fannie and Freddie guarantee — have begun to default.
They have a lot of power in that for me to approve a borrower; I need to run their numbers through either of their computers (Loan Prospector or Desktop Underwriter) to get it approved. Both are considered industry standards and if they go away, we will be in the same boat with loans $417,000 and below as we are in jumbo loans. (jumbo loans do not go through either software)
So, why is there was so much going on in the news? Our friend, good ol’ Sen. Chuckie Schumer, D-N.Y., decided he would slap the Office of Federal Housing Enterprise Oversight in the face because he was upset with them over Indy Mac’s (cousin to FNM and FRE) current financial situation. What he said began a domino effect that forced Indy Mac to change ownership (from public to govt). Indy Mac stated “The immediate cause of the closing was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York.”
A successor institution, Indy Mac Federal Bank, is to open for business Today and be run by the FDIC.
In the wake of that essential bail out, everyone is concerned that the same thing could happen to FNM and FRE. Sunday, the Treasury and the Federal Reserve announced extraordinary support for them, an indication of how troubling their collapse would be.
From the end of 1990 until the end of 2003, the combined portfolios of Fannie Mae and Freddie Mac catapulted from $135 billion to $1.56 trillion, according to the Federal Reserve. Together, the two companies issued nearly $3 trillion in debt.
I know that was a good bit more info than a typical Weekend Update but I thought is was all pretty relevant. Thanks for reading and I hope it will help you if one of your buyers asks about it.
Talk to you soon.
dz
Here are the links to where I pulled my info from.
http://www.usatoday.com/money/economy/housing/2008-07-12-fannie-freddie-monday_N.htm?loc=interstitialskip http://online.wsj.com/article/SB121573420539844247.html
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