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Fannie, Freddie healthier and that’s good news

By: 22 June 2011 No Comment

Fannie Mae and Freddie Mac – the two government sponsored enterprises (GSE) that have been operating under federal control since 2008 – are losing less money and that’s good news for people wanting to see those two entities continue operating.

The GSEs, of course, are major players in the secondary mortgage market. Fannie Mae and Freddie Mac, in essence, buy mortgages from originators, bundle them together and sell them as mortgage-backed securities. Their role is, in essence, to keep credit flowing so that loan originators can keep writing mortgages.

Ideally, lenders free up capital by turning over their mortgage debt and obligations to Fannie Mae, investors pick up mortgage backed securities and the GSEs realize a profit that can further enhance mortgage markets. The system rather broke down around 2007 when Fannie Mae and Freddie Mac got stuck with a lot of bad debt through some questionable mortgage practices.

The alarming default rate that drained the two GSEs of capital caused the federal government to step in, bail them out and regulate them in hopes of avoiding calamity in the future. There has also been a movement to wind them down altogether and increase the role of private companies in the lending market.

Why are Fannie Mae and Freddie Mac important? They keep credit flowing, thus making affordable mortgages available to millions of Americans. The two GSEs own or guarantee more than half of the nation’s $10 trillion in mortgage debt – anything major that happens to Fannie Mae and Freddie Mac has a huge impact on mortgage markets.

The GSE’s got some good news in mid-June. The Federal Housing Finance Agency – which regulates Fannie Mae and Freddie Mac – announced the agencies lost $28 billion in 2010. Why was that good news? Fannie Mae and Freddie Mac lost $93.6 billion in 2009, meaning it is imperative that the GSEs slow down and eliminate those losses if they are to continue.

The improved 2010 was attributed to better underwriting practices which resulted in less risk for Fannie Mae and Freddie Mac. We know there are still some problematic loans in the system, of course, so we can count on struggling markets through at least the first quarter of 2012.

A lot of those problem loans were written prior to about the middle of 2007 when subprime lenders started failing. Many of those loans came with great introductory rates that expired after five years, meaning borrowers who were able to make their mortgage payments just fine ran into trouble after those terms expired and interest rates on those loans made it impossible for some homeowners to remain in their houses.

Some of those loans are still out there and could result in more mortgage defaults and foreclosures.

As for Fannie Mae and Freddie Mac, the fact that stricter underwriting has led to fewer risky mortgages and slowing losses is good news, indeed. Should their fortunes continue to improve to the point where those GSEs are seen as an asset to homeowners rather than a liability to taxpayers, perhaps the question of what needs to be done to make sure credit is available to potential home buyers will be obvious.

Home Sweet Home is written by Ethan C. Nobles and is sent weekly to publications throughout the Natural State on behalf of the Mortgage Bankers Association of Arkansas.

About: Ethan C. Nobles:
Benton resident. Rogue journalist. Recovering attorney. Email = Ethan@FirstArkansasNews.net.

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