9/11/2008

What Does the Fannie/Freddie Takeover Mean to You?

Fannie Mae (FNMA) and Freddie Mac (FHLMC) are two of the government sponsored enterprises established by the U.S. Congress to make loans and loan guarantees. They reduce the cost of capital for certain borrowers, including homeowners. They are regulated, no longer by HUD, but by a new regulator, the Federal Housing Finance Agency (FHFA) under the recent reorganization signed into law in July by President Bush.

The 12 GSE banks which also help finance housing are also a cause of concern to those who "worry that the rapid growth of other government-sponsored enterprises, most prominently the 12 Federal Home Loan Banks, eventually might create headaches for the financial industry and American taxpayers." The home loan banks, which were created during the Depression amid a wave of bank failures, have lent billions of dollars to banks and thrifts that are themselves exposed to troubled home loans.

In terms of names we recognize (per a New York Times article) "Washington Mutual, the nation’s largest savings and loan, nearly doubled its borrowing from the Federal Home Loan Bank System over the last year, to $47.7 billion, according to government filings. The Wachovia Corporation has also ramped up its borrowing, in part because of its acquisition of Golden West, a big California lender. In 2007, before it was sold to Bank of America, the Countrywide Financial Corporation took out more than $53.2 billion as it fought to stay afloat." Perhaps you've noticed the TV ads to bring in new customers--the mortgage side of some banks is struggling and they are attempting to build up their retail side with new customer accounts.

"Collectively, the home loan banks have never reported a loss in the system’s 76-year history. Many experts say the risk that lenders will fail to pay back the home loan banks is small, particularly because the loans are secured by collateral in the form of high-quality mortgages and other protections. Still, the explosive growth of the system concerns some analysts, who worry that the loan banks enable overly aggressive lenders to continue to make loans. "

On the other hand, the GSEs hold nearly half --or $5 trillion-- of all mortgages in the U.S. and account for almost all of the new mortgages in California, and one question is, will a privatized Fannie and Freddie change the availability of the fixed 30-year mortgage? The lack of institution-based mortgage securities may mean more expensive capital, and more expensive home loans. This will greatly affect the markets in areas such as California and reduce homeownership, if these GSEs are not allowed to carry out their basic mission?

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