We all know that Fannie and Freddie are now in conservatorship of the US Government and that there is new leadership at the helm in both of the GSE's (Government Sponsored Enterprises because they were chartered by Congress to create a more stable mortgage market) .
Each of these companies have agreed to issue 1 billion of senior preferred stock to the US Government and they also must issue warrants, in effect allowing the government to buy up to 80% of its common shares. The real issue is that in 2010 when supposedly they must to rid themselves of a majority of their debt at 10% a year, the government's plan is to bring each of their debt ( or the aggregate amount of the loans it can issue) to only $250,000,000,000 ( 250 Billion) each. That may seem like a lot but it represents only about 1/3 of each of their current portfolios.
Because Fannie Mae and Freddie Mac bridge that needed gap of supplying affordable loans irrespective what the stock market investors are doing, it has been a constant in our home lending industry that we in the industry and consumers alike rely on for affordable loans.
If they are made to disappear, which could be the plan behind the plan, we would then have limited the source of loan providers and ultimately be more greatly tied to the very people that actually played a major role in the housing crisis in the first place.
Joel Singer, our Executive Secretary of our California State Association released this video today and it will help you better understand the important and significant role that Fannie and Freddie play in the market and what would happen if these entities disappear. Meaning that if the government actually has in mind to shrink their status to be non-existent , the affordable smaller loan market would be severely damaged. We must watch this process carefully and encourage Congress to be prudent but also to be very careful we don't end up throwing the baby out with the bath water. Patience, oversight and great care must be exercised to ensure that these entities remain a viable source for affordable loans.
In the short term I agree with the Treasury's actions to shore up the confidence of their capital investors. In the longer term, I fell strongly that we need this competitive force in the housing industry.
I read recently that Forbes takes the view that Fannie and Freddie would be far better if broken up into a dozen competitive companies. At this time I would be in disagreement of that outlook because the GSE's being hybrids have always had the presumption of our Federal Government as their overseer and it has been assumed that the good faith credit of the Federal Government has been one of the key reasons they have had the ease in raising capital, especially from foreign governments. And we are not talking small change here.
While it is true that Fannie and Freddie may not have exercised the care that was needed in the management sector of their enterprise, I don't feel that a permanent takeover would be justified or in our best interests in the real estate and lending industries. The Fed, Treasury and Congress do need to set stronger management guidelines and over site which they already should have done but seemed to me to have taken their eye off the ball.
In football analogy, The GSE's were moving the ball closer to the end zone but in fact were heading to the wrong goal posts. It is my hopes that they they can be pointed in the right direction and that this turn around is not the end of the game for Fannie and Freddie as we know them.
28 Comments on Do You Understand Why Fannie and Freddie are so Important to You?
SEP
12
2008
Good afternoon William,
Very insightful post! I also viewed Joel's video. I for one am not ususally in support of goverment bail outs and take-overs, yet this time I really don't think there was any choice. This downturn had cut deeper and hurt more folks that I've ever seen. The housing segment in itself just drives such a huge part of our economy it would be devastating (imho) in the long-run not to do so.
It would be interesting to think that at some day they could be broken up into lot's of different companies, guess time will tell.
Hi Lynda, It is always refreshing to share opinions and ideas with you. We all do want what's best and I hope for the best in this situation. I think we are seeing the first flow of reaction in the dropping of rates but also feel that it will be short term as these two enterprises are shored up. I hope that many buyer's will take advantage while they can in hopes that rerates will stay low through the rest of the year.
The future is open to speculation but I am hopefull the right course will be followed and we can expect some normalcy. There does need to be some pressure applied to stabilize the underwriting criteria and not make the loan process so limiting. Hopefully that begins to happen soon.
On a very personal note, it is with so much great sadness that late yesterdy after at 4:30, we lost our battle and my little one is now on her way taking the rainbow brige detour to where we will both be together again one day.
I share the same views as Lynda.... this time I really don't think there was any choice
We will not know the impact this will have on our housing market...but I am sure that the severity of what led us to this point surely ... there has got to be a better answer. We'll see.
Hi William, I'm with Lynda & Sally....what will be the outcome. I think that remains to be seen. There is no doubt who will pay--us, the taxpaper---but what other choice was there?
Hi Sally, As they say, it is for time to play out all the hands and see who gets the Royal Flush. It is way to early to speculate but many believe that this was needed. What I thought was more interesting was the timing. It is now done and we can only hope for the best. But my longer term prognosis might have gotten a bit more cloudy.
Your last question about my little one. I am fixing to call you a bit later. Sally, she passed on late yesterday. Her valiant fight is now over.
Hi Cynthia, I think in the short term the actions most likely were right and that it calms down those that were losing faith in our mortgage securities. This may have stopped the bleeding and the very short term benefit will be lower rates. So far so good. next year though when the portfolios have to be reduced, and another reset of the adjustable,more confusion and more uncertainly will be the likely outcome. Thinking we had passed the hump may have been too wishful thinking. But I remain hopeful and encouraged in the shorter run.
William - Ok, okay:-) I'm no financial expert and God only knows what it (short term and long term) would have done to the economy, but I believe that the bail-out was the wrong thing to do. People spout off that they want less government, yet we sit in comfort and smile when they get more involved. Fannie & Freddie are businesses, they should have been left to fail or succeed... whatever the case.
What other choice was there? Things, including lending, become more localized. Akin to back in the day when a handshake and a relationship got you a loan. Now, obviously the volume is too much these days for 'a handshake and a relationship to get you a loan' to be truly the case... but manual (not automation) underwriting will come into play and help strengthen portfolios of any new investors looking to get in the game. There's money to be made, who wants to make it? What do you do to ensure you don't lose it? Answer to question number one, most of us want to make some money. Answer to number two, you can't ensure you won't lose it. That's business, that's risk, that's capitalism.
William - I am so sorry to hear about your little one. It was a tough fight, and a long one. Things are better now.
This was a great read. I think we all knew this was going to happen - it was, IMO, a foregone conclusion. The bigger question is what the government will do going forward. And how will the new administration, whoever it is, be involved. Lots of questions and speculation. I haven't watched Singer yet but will. The drop in rates was expected, I think, but I suspect things will get tighter next year in terms of mortgage standards.
I'm still trying to think this stuff through. I just can't figure out why the free market pricing system isn't still the best way to adjust supply and demand, whether it be oil or the price of money.
The federal guarantee distorts the risk to reward ratio. It just puts the risk of loss onto the taxpayer. If the money markets think that it's too risky to make loans at a certain interest rate, why should the taxpayers want to take on that risk? If I want to take on risk, I'll make an investment myself and then take part in the rewards in addition to the risks.
If mortgage rates were at higher free market levels, people would demand smaller homes that they could afford instead of the huge lavish homes that have become so common. Not that I don't like nice homes but the money that is now funneled into that type of consumerism might be used more productively if it were available to be invested in capital that is productive. People might invest instead in factories and machines that would actually create real wealth. Building a fancy home really doesn't produce wealth. Building a factory or machine that can produce stuff is how real wealth is produced. Just remember, wealth is created by production, not by consumption.
Hi Jason, You make very valid points. We can only hope that the actions bode well with the the investors as new capital is needed and hopefully things will get better. We do need some pressure to try to the get the guidelines a bit less onerous and hopefully that will happen as I am sure NAR and MBA will be voices of reason that the oversight will listen to. Hope springs eternal once again.
Thanks you also for your nice compliment. Time will indeed tell but I think your analysis is spot on! What happens next will or at least could have a major effect on our industry and it is too soon to try and see that crystal ball and what direction things take. But I with you expect tighter not easier credit in the months out.
Hi Tim, you have given this a lot thought and it is reflected in your questions and challenges. Keep the faith, things are still actually unfolding and we can only hope that better circumstances are on the horizon. I am confident we will make it through the short term and the longer term is unclear but will bring forth risk/reward/ and opportunities. My hope is that the right people seize them. And I am sure your hope is the same.
Free market is still the best way but we can't change what we can't change. Moving on, we all must try to make the best of the what we have and do the right thing.
Hi Pippa, there are and it is likely to get even more difficult as we head into the new year. But for now, the rates are lower and hopefully qualified buyers will take advantage. The new key words for a while will be FHA and VA.
Hi Garren, there is concern both ways in this and there is no easy answer. We can only hope that this all works they way it is intended and that Fannie and Freddie under better supervision stay a major part of our lending process.
William, I am trying to get my head around all this. I hate government bail outs period, but this is an unusual time so unusual methods are necessary. I do like the fact interest rates went down this week, then gas jumped up, so point, counter-point. I'm so sorry about your buddy, (((hugs))) to you.
Hi Missy, Thank you for your note. It is much appreciated
It is not so much the bailout as the fact that with approx 50% of all the mortgages ( Over 5 Trillion) the real risk for the future is that these GSE's may be destined to disappear. I think it was more a management problem With bonuses over over 24 million, what were these companies thinking? There were serious errors of thinking , no doubt , and I do feel it was necessary for the Fed to step in in the short term. But the stock and warrants give one the impression that this may not be so short term and that is where my real concern lies. There is concern and in time we will know better how this decision will manifest itself. It is my best hope that this plan works and that there this solution bears fruit.
Hi Michael, Thanks for dropping by and when you do get that clarity, I hope you will share it. There is certainly a need for all of us to better understand. I am certainly hoping for the best long term result and that is that Fannie and Freddie under better supervision will be able to remain a source for affordable loans for homeowners down the road.
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