Freddie and Fannie who? What the crisis means for you !
September 8th, 2008 Categories: Buyer's Corner, Market Conditions, Trends
Can you tell it’s an election year? Gas prices are coming down finally and the credit crisis is being shaken up big time! My mom always said, “sometimes it takes a crisis to solve a crisis”, and that most people need to be hit in the head with a 2 x 4 to get their attention first!. Yes indeed! Can you imagine the headache Fannie Mae and Freddie Mac have right now? The whole housing crisis would not be the same unless the big boys and girls Fannie Mae & Freddie Mac didn’t get involved. It was and continues to be an unraveling real estate disaster, however, something inside of me says that it’s a long awaited relief that will bring needed change to the current state of affairs in the mortgage and real estate industries. So I can’t wait to hear the hype that the media will incorporate into the election. The candidates keep talking about “Change” and I’d really like to see this real estate market change! The DNC and RNC haven’t publicized their views much in the last few days on this subject, but since this is an election year I imagine that both the McCain and Obama campaigns will be ruthlessly scrutinized on the positions they take on this. To give you a introductory background history on where the Dems and Reps have stood previously; the Washington Post states today the Dems argue that F & F companies deserve public support because they perform a critical service, particularly for low income families. The Washington Post also says the Reps are saying that the private companies can do the same thing and that the government is just subsidizing profits for all shareholders of both companies. That might be! McCain wants the firms to be downsized or closed, however, he is being criticized as being too ideological and simplistic about the situation. The Obama campaign hasn’t taken a position on this yet however he thinks the status quo is “untenable”. Dem lawmakers from the House Finance Service Committee and the Joint Economic Committee say that any reforms must preserve the company’s public role in making mortgages available and affordable. I couldn’t agree more and as a Realtor in the good state of Colorado even the Boulder real estate market is feeling the pinch.
OK, but what does this mean to you, us, me personally?
- It will give a boost back into the real estate industry (whether you are buyer, selling or are a Realtor) by stabilizing the US mortgage market by ensuring ensuring that F & F will have enough capital to continue funding mortgages
- It will help take uncertainty out of the current market by making F & F investors more willing and more comfortable with risk of buying mortgage backed securities and because government involvement gives a sense of security
- It will help bring down mortgage interest rates as demand increases because the expense of lending will be brought down, eliminating prior F & F lending fees and relieving the high cost of risk. Although unsure, rate drops are probable in the near short term to improve modestly, in fact we already saw a drop of .25% in rates today
- Sorry to say but the effect of this bailout will only affect those shopping for new loans, not currently held mortgages
- It will make your lender work harder to lower your rates and fees attached by forcing them to compete.
- Make sure and ask your lender whether your mortgage would qualify to be bought out by F & F – and how that would affect your rates and charges – Congress recently passed a new limit on loans of up to $729,740 for single family homes in high cost areas but if your mortgage exceeds that amount you might need to go to a Jumbo Loan which will remain more expensive
The other part of this is that overall the biggest winners are the holders of F & F debt including many Asian central banks and municipal pension funds in the US because now they are protected against losses. Fannie & Freddie were originally created by the Feds to increase supply and reduce costs of mortgage loans, so optimally I believe they should be developing a hybrid model serving the public needs (as public utility companies) and making sure the shareholders can’t receive windfall profits, reduce the incentives for management to pursue innovations to create bigger profits for themselves by putting regulation caps on and figure out a way that once again the everyday tax paying person like myself isn’t paying the tax bill for some greedy CEO.
