In order to understand the relations between the Government Sponsored Enterprises and the Housing Market, it may be best to start with a little report of Fannie Mae and Freddie Mac's historical background. It all started when Franklin D. Roosevelt's New Deal came into effect. The federal government established the Federal National Mortgage Association, better known as Fannie Mae, in order to help reform the financial theory while the Great Depression.
Fannie Mae's purchasing authority began with the Federal Housing Administration's (Fha's) insured mortgages. In 1944, it vast to include loans guaranteed by the Veteran's administration (Va). In 1968, the Vietnam War caused a strain in the national budget, which forced old president Lyndon B. Johnson to sign an amendment to Fannie Mae's lease Act. This new Act was to free up space in the government's national budget by turning Fannie Mae into a private, shareholder-owned company. However, Fannie Mae was and is still currently a government sponsored firm (Gse). This means that Fannie Mae has the benefits of being confidentially owned, publicly traded, and operated by shareholders while also having the benefits of tax exemption and government support.
Current Fannie Mae Refi Plus Programs
In 1970, the Federal Home Loan Mortgage Corporation (Freddie Mac) was established to operate any additional monopolization exercised by Fannie Mae. In the same year, Washington authorized the two Gses to buy approved loans, which is currently comprised of prime and subprime loans. Prime mortgages are designed for borrowers with good reputation who typically receive lower interest rates and more affordable mortgage options. Subprime mortgages are typically offered to borrowers who have low reputation scores and/or fit into the lower income bracket. Fannie Mae and Freddie Mac were designed to open opportunities for homeownership. Therefore, they need to produce the firm principal to make homeownership affordable for borrowers. These two Gses are not lending institutions and therefore do not lend money to borrowers directly. Instead, they contribute funds to the lenders straight through their secondary store functions. The secondary store constitutes some of the top buying authority with purchases being exchanged between lenders, banks, and savings institutions.
Foreign investors have helped Fannie Mae and Freddie Mac receive the principal funds for the U.S. Housing store in exchange for the guarantee that the principal and interest will be paid back regardless of borrower defaults. The added relax for foreign investors came from the government backing that these two Gses have. Fannie Mae and Freddie Mac have written guidelines that set the limit for conforming loans. These guidelines are set to minimize the reputation risk of borrowers, who go straight through a series of paperwork and qualification process in order to settle their likelihood of mortgage default.
How do Fannie Mae and Freddie Mac make money? They fee lenders who in turn fee the borrowers a guarantee fee on loans that it has securitized into mortgage-backed protection bonds. In addition, Fannie Mae and Freddie Mac behalf from the variation between the interest rate they fee the homeowners and the rate their investors fee them.
Subprime lending turned into an avenue of increased possibilities for the two Gses. Higher risk borrowers meant higher rates charged. The higher the rates expensed the less likely the borrowers were able to qualify. Therefore, programs that increased the borrower's capability to qualify became more available. Such programs include adjustable rate mortgages, balloon mortgages, interest only, and increased amortization periods. The increased available programs produced more competition between the mortgage giants. In the 1990s, the two Gses began their participation into subprime lending with A minus bond purchases. Over time, the competition within the subprime mortgages that were offered to high risk borrowers caused an increase in home values, which in turn caused an increase in equity available to borrowers. This led to equity liquidation, which in case,granted temporary available funds for homeowners. Many high risk borrowers accepted adjustable or negatively amortizing programs in order for them to qualify for their mortgages. These programs made it temporarily affordable for borrowers to pay their mortgages. However, after a sure period of time (typically three to five years), the mortgage programs that were accepted by these borrowers forced them to find an alternative to their mortgage term as their mortgage's adjustable rate caused their payments to increase.
Today, subprime lending is practically nonexistent. ;Lesser programs have become available to borrowers who have had their equity reduced and debts increased. Increased delinquencies have caused lending institutions along with other mortgage giants to tighten their guidelines and minimize programs that were once created to increase homeownership over the country.
The Gse bonds backed with subprime loans may appear to be causing quite a stir, not only in domestic markets, but in foreign markets as well. As of the end of March, practically .5 trillion in securities were held by foreign investors. There is investment that the Gses might be request the U.S. Government for additional help in the matter. Will the government come straight through for these two companies? What will the additional costs be to taxpayers? How will Americans cope with higher buyer prices and less revenue due to higher taxes? Is it possible for the government to help both the Gses and their digressing economy?
comprehension Fannie Mae, Freddie Mac, and the Housing shop
