Its has been reported that The Federal Home Loan Mortgage Corporation AKA: Freddy Mac and The Federal National Mortgage Association AKA: Fannie Mae are on the verge of insolvency which would either lead to a massive government bailout (bad) or bankruptcy (worse).
These are Government Sponsored Enterprises’ (GSE) that were chartered by the government, but in no way are backed by them. The purpose of these GSE’s is to make it easier and cheaper for average JonBon’s like you and me to get a home loan.
Without Fannie and Freddy Banks make loans to individuals to purchase a home. Now if the bank had to wait for you to pay them back completely then it would take up to 30 years! So therefore this bank could only make one loan with those funds every 30 years. It would take a ton of banks and trillions of dollars to operate that way.
What Fannie and Freddy do is purchase the rights to that future cash flow from the banks. So the banks then sell the loans, get back the cash they lent and are free to make more loans. Fannie and Freddy don’t sit there and hold onto these trillions of dollars in loans. They package them up into manageable pieces and then sell them on the open market for banks, investment houses or for anyone else to buy.
Fannie and Freddy make the systems much more efficient and cost effective. They are suffering along with everyone else from the billions in sub-prime loans that they purchased from banks. When a loan defaults, they are often left holding the bag.
This is a story that probably will affect all of us even if you don’t have a mortgage, so stay tuned.
How did all those banks, savings and loans and secondary markets like Freddie and Fanny throw caution to the wind and lower their lending standards to, well, next to nothing.
Competitive pressure? Belief that housing prices would always escalate?
For as long as I can remember, there were requirements to get a loan (primarily income, % down) which made it reasonable to expect repayment.
Zero % down, borrow the closing costs, adjustable rate mortgages and no income verification – what did they think would happen?
[...] Well it finally happened. The CEO’s of Fannie May and Freddie Mac have been ousted, and both of the company’s have been put entirely under government ‘conservatorship’. This by default makes the federal government the de-facto largest mortgage lending in the country. To see what Fannie and Freddy do, click Here [...]