There are a lot of mixed feelings at present about the Feds decision to standbehind the two largest mortgage holders in the secondary market. Secondary market refers to the business entities which purchase mortgage paper from primary lenders, like your bank. Purchasing these mortgages, usually bundled, from your bank, frees up capital for the banks to continue making loans in their local marketswithout carrying that paper for 15 to 30 years and overburdening that portfolio. Fannie Mae, begun by FDR was the first, and Freddie Mac the second of the government sponsored lenders, though set up as private enterprises.
No one who believes in our system of free enterprise, risk vs. opportunity in business, likes to see the Federal Government intercede and financially aid in any way a private concern. But in this case, I believe it was the right thing to do.
Part of the reasoning lies in the first paragraph above. The health of the secondary mortgage market and its attractiveness to new investment is imperative to see the country through the real estate downturn we are now experiencing all over the country. The real estate industry, home building, and all the suppliers, employment account for such a chunk of our economy, we can't afford to have it fail.
Some say this should not be done at the expense of the taxpayer. On the surface, that is the way it appears. I'd like for you to consider this: the government created this situation in the ‘90s when it decided every American "had the right" to home ownership. Consequently, the FHA issued new lending guidelines which included relaxed personal credit standards for borrowers, down paymnent assistance programs which allowed buyers to own homes without any personal funds at risk (equity), and created an influx of new lenders and mortgage brokers into the market that weren't regulated.
The result? We, and when I say we, all that benefitted directly or indirectly from the building boom which ensued in the mid ‘90s and for many markets extended into 2007, placed people into home ownership that were not ready for the responsibility. We effectively borrowed from the next generation of home buyers. We are now sharing in whatever backlash has been caused by the glut we helped create.
Only 1 in 110 homes, nationwide are in foreclosure at this time. You probably have heard it in much scarier terms. It will take a little time, but with the help of the Fed, not only to the backers of outstanding loans, but also some relief to homeowners in the way of restructured loans, we will dig out of this hole.
You will probably never see the relaxed lending standards of the last ten years again, nor the velocity of home building and sales that came with it. What we should evolve to in the next cycle, is a more savy, and credit conscious consumer. They will have to be if they are to realize the American dream.
Copyright 2008 L. Dean Davidson / http://www.RelyOnDean.com
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