I remember when I was a young girl, and my mother would tell me horror stories of the Great Depression; banks closing, money lost, no work and food shortages. It never seemed quite real to me as a baby boomer, and I always wondered how things ever got to such a desperate state.
Well, I don’t think we’re on the verge of a depression, but I think it’s hard to deny that we’re in a recession. And more so now then at any time in our history, the declining housing and mortgage markets are playing a major role in this economic downward spiral.
The demise of Indymac was a wake-up call for many as it was all too reminiscent of those depression stories or the savings and loan crisis of the ‘80s and early ‘90s. The difference now of course, is that we (the government) actually did learn from those debacles and unless you were foolish enough to have over $100,000 in deposits at Indymac, your money is safe.
But what about Fannie Mae and Freddie Mac? Last Friday’s scare had many of you writing me to learn just what that might mean to you and your home loan. And the bottom line is probably nothing at all.
Fannie Mae, The Federal National Mortgage Association (FNMA), was originally created as a government agency back in 1938 to provide a secondary market for FHA loans, which were also new at that time. In 1968 Fannie Mae was re-chartered and became a publicly held organization, and in 1972 began buying conventional loans, (those not insured or guaranteed by the federal government – non FHA or VA).
Freddie Mac, the Federal home Loan Mortgage Corporation (FHLMC), didn’t come on the scene until it was created by the Emergency Home Finance Act of 1970. It is a Government Sponsored Enterprise that is stock-holder owned. Freddie Mac is authorized to make loans and loan guarantees. Freddie Mac buys mortgages on the secondary market, pools them, and sells them as mortgage-backed securities to investors on the open market.
What is critical about Fannie and Freddie is that they are the largest investors in home mortgages in the country. Without Fannie and Freddie there would be little money avaialbe to lenders to make home loans, thus thier stability is critical to the economy. Although both organizations have lost money over the past year, both have reserves above the government required minimums and neither is in danger of being taken over by the Federal Government.
So what does this scare really mean? I’m no economist, but as a mortgage broker I see two probable results: 1) In order to deliver only the highest quality loans for re-sale on the secondary market both organizations are likely to tighten their lending guidelines, which although spurring investor confidence may limit the number of people who are able to purchase or refinance; and 2) As a result of tightening guidelines in the conventional loan marketplace, we’re likey to see continued growth in the numbers of FHA loans.
My advice? If you are thinking about making a home purchase or refinancing and not sure if you’d qualify for a conventional loan, don’t overlook FHA as there are several aspects to the program that just might open doors you thought were closed, such as low credit scores and high loan-to-value ratios. Please drop me an email at marti@kilby.com if you’d like to know more.
