Fannie Mae (FNMA) is an acronym for Federal National Mortgage Association.  It is a government sponsored enterprise (GSE) of the U.S. Government.  It was created in 1938 as part of President Roosevelt’s “New Deal” to provide money and liquidity to the mortgage market which collapsed earlier in the decade during the Great Depression.   It is a shareholder-owned corporation authorized to make loans and loan guarantees. 

Freddie Mac (FHLMC) is another GSE, founded in 1970, has the exact same functions and operates the exact same way as Fannie.

The main mission of Fannie and Freddie is to provide liquidity into the mortgage markets by purchasing loans made by local lenders and repackaging them into bond-market security pools that are sold to investors with the U.S. Government’s stamp of approval.  A simplified example is, I may get you a home loan with Wells Fargo at 6.5%——who then sells your loan with a bunch of others (called pools) to Fannie/Freddie for 6.0%, who sells them on Wall Street (called mortgage backed securities).  Wells Fargo collects your monthly payment (called servicing) for a fee; however, they’ve already sold your loan on Wall Street.  This loan is “guaranteed” by Fannie or Freddie, which is what makes our interest rates so low.  Without this flow of money (liquidity), our home rates would be, who knows, 2% to 4% higher, is a guess.

HISTORY

In 1968, to remove the activity of Fannie from the annual balance sheet of the federal budget, it was converted into a private corporation.  Fannie ceased to be the guarantor of government-issued mortgages, and that responsibility was transferred to Ginnie Mae (Government National Mortgage Association).  This entity falls under the guise of HUD and provides all of our FHA and VA loans—amongst others, such as Indian Housing and Rural loan programs.  In 1970, Freddie was founded to expand the secondary mortgage market and to combat Fannie’s monopoly.  When you hear the term “Conventional” loans, that means Fannie & Freddie, which are allowed to guarantee loans up to $417,000.  Anytime you hear “Jumbo” loans, those are loans greater than $417K, money comes from a smaller pool of non-Fannie/Freddie investors, thus Jumbo loans higher rates.

TODAY 

Fannie and Freddie own/guarantee over half of the $12 Trillion mortgage market.  There is a wide belief that these securities are backed by some sort of implied Federal Guarantee.  These days, Congress, The Fed, The SEC are all talking about how to keep Fannie and Freddie afloat if the foreclosure rate threatens their liquidity.  The big fear for our economy is if these GSEs will eventually be supported by U.S. Treasuries, then eventually, us tax payers.  Stay posted!!

FED Meets….Holds Rates Steady!!

The Federal Reserve Board left short-term interest rates unchanged today, ending a ten-month spate of cuts.  Signaling that inflation is now a greater threat to the economy than recession, the “FED” left the benchmark federal funds rate at 2%.   The commercial prime lending rate, a benchmark for millions of business and consumer loans—such as auto loan rates, home equity 2nd mortgages and credit card interest rates—will remain unchanged at 5%.  The Fed voted 9-1 to keep rates the same, the one lone dissenter being Dallas Fed President, Richard Fisher.   I’m surprised the vote was that close, given that three other Fed presidents, most notably the ones from Virginia and San Francisco, openly stated their support to raising rates to stem inflation, just a few weeks ago.  Their comments, along with the same sentiment openly echoed by Fed Chairman Ben Bernanke, was the impetus for consumer interest rates to rise over a quarter % the past couple of weeks.

ILLINOIS FILES SUIT AGAINST COUNTRYWIDE

Remember my rant against the lobbyists (mostly from call-center banks) who are preventing legislation for mortgage licensing?  Well, this is what happens when you incent “call-center L.O.s”, to write loans in volume, with no regard to consumer suitability:

Illinois Attorney General, Lisa Madigan, is suing Countrywide Financial, and CEO Angelo Mozilo, contending that the company and its executives defrauded borrowers in the state by selling them costly and defective loans that quickly went into foreclosure.  Amongst the most damning evidence, were e-mail messages sent to borrowers on their one year anniversary date, stating “Happy Anniversary—home values skyrocketed over the past year.  That means you may have thousands of dollars of home equity to borrow from at rates much lower than most credit cards”.   This created an atmosphere of refinancing the same people, over and over again, with loan costs that were repeated, all while adding to what was owed on the house.  For me, I’m not one who is crying for individual consumers who made bad choices—we’ve all done that one time or another.  But when you read that Countrywide’s call centers closed 60% of their loans on either sub-prime (poor credit) and Hybrid ARMS (negative amortization loans), one who knows this business can see that they were predators to the less educated or vulnerable borrowers.  I have been frustrated  because at one point a lender was calling three different clients of mine who had just closed loans four months earlier.  The problem?? I got them the loans through this particular lender and all 3 clients had a one year pre-pay penalty, due to prior credit issues.  Rather than wait for the one year to pass before putting them in an FHA loan (the plan), the lender tried to refinance them into a similar loan and deceived them into thinking their pre-pay penalty was waived.  It wasn’t.  It was rolled into their $14,000 of closing costs!!  OUCH!!  Now, they are getting sued.  KARMA Lives on!!