Much more about the developing situation around these two former GSE entities in the news today. When these two agencies were first birthed by Congress about 40 years ago, the goal was to bring order and stability to the mortgage lending activity in America. Prior to their creation, mortgage lending was mostly a function of local banks and savings banks, with some insuring activity available from VA and FHA. These were the days of 20% cash down payments and your choice of 30 year or 15 year fixed rate amortization loans. Life was pretty simple then. Home ownership rates were climbing as income and savings increased for Americans following WWII.
Of course it helped to live near the money centers as those banks had money to lend whereas in much of small town America, that was not true. But, you did know the lender - and more importantly, he knew you, your family, your parents, and probably your teachers and your minister too. Most mortgage lenders held their own paper - called "portfolio" lending, collected the payments, and eventually handed back the original of the note you signed when you borrowed the money.
With the goal of making money available to more Americans to buy homes, Congress created FNMA and FHLMC - two agencies to allow for some competition. They were not really agencies of the government. They were private stock corporations with a special deal with the government to protect their business interests.
The idea was to provide a market for mortgage lenders to sell their mortgages for cash, thus enabling the lenders to make more loans to service more customers. The F's bought these mortgages, gathered them together into "pools" and sold rights to receive the principal and interested cash flow streams to large investors.
It worked pretty well for about 40 years. Qualified borrowers able to demonstrate income, credit, assets, and credibility routinely borrowed mortgage money of 80% of the purchase price of a home and as debt ratios ran to a maximum of 1/3 of income for the full mortgage debt and only another 5% of income for all other debts combined, could actually be expected to make the payments on time for the entire term of the loan. It worked so well that about 35% of all homes in America are owned free and clear of any mortgage.
What will the new plan will accomplish? Markets are somewhat confused right now. Things looked pretty good on Monday. Not so good on Tuesday. Bottom line, you and the rest of we taxpayers, have a 5 Trillion Dollar liability to share.
More tomorrow.
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