Who are Fannie Mae & Freddie Mac?
Prior to this weekend, they were two publicly owned companies. Both entities work behind-the-scenes in the mortgage industry – buying, packaging and selling groups of home loans to investors on Wall Street.
Here’s how the cycle works: a mortgage lender lends consumers money to buy a home in the form of a mortgage. The mortgage lender then sells those mortgages (those that meet required underwriting guidelines) to Fannie Mae and Freddie Mac, and uses the money they receive from selling those loans to make more consumer loans. Meanwhile, Fannie and Freddie package the loans they’ve bought and sell them to investors on Wall Street.
The idea is that by buying the loans and reselling them, Fannie Mae and Freddie Mac free up money for lenders to write more mortgages and get more Americans into homes. It’s like the circle of life – or the circle of loans.
Like many Americans having trouble selling their homes, ol’ Fannie and Freddie have been having trouble selling their packages of loans. The investors who typically buy from them have become much pickier about what they’ll buy – with good reason – they were worried about increased risk as mortgage defaults rose and home prices fell. This increased risk essentially meant that even Fannie Mae and Freddie Mac had to pay higher interest rates for their money, which was passed on to consumers in the form of higher mortgage rates.
Since the two companies own or insure about $5 trillion in mortgages (nearly half of the nation’s total), the world has been watching them very carefully. Especially the American government. In the opinion of the government leaders, Fannie & Freddie were headed toward failure. Since they’re so big, their failure would have dramatic (likely worldwide) consequences on the financial markets and on the ability of consumers to get a mortgage. So Uncle Sam worked the weekend and officially stepped in.
What does the takeover mean to Americans & the mortgage market?
The ultimate goal for everyone is that this action stabilizes the weary American housing market. As of now, it seems to be working.
Already today, mortgage rates are falling. Why? Fannie and Freddie are kind of like big insurance companies. Before this announcement, investors worried that Fannie or Freddie might not be around to pay if mortgages they bought went sour. Now that Uncle Sam has stepped in, mortgage bond holders feel much safer. Happy investors = lower mortgage rates.
Will there be new rules for loans? Too early to tell. Guidelines and loan regulations will definitely be examined, but no one knows if the government will be making changes to how a person currently gets a home loan.
For people looking to buy a home, ‘tis really the season! Rates are down, home prices are down – it’s a win-win situation for home buyers. Home sellers are willing to negotiate and a buyer can lock in a historically low rate. This is one sale home buyers should not miss.
For people looking to refinance, it’s time to act. While rates are dipping now, it’s unclear what will happen in the near future. Because something like this has never happened before, no one knows what the long-term effects will be or if the government will change any current mortgage guidelines.
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