Housing Finance reform not forgotten
In the president's speech on Aug. 6, on responsible homeownership he alluded again to the disbanding of the government sponsored Freddie Mac and Fannie Mae, blaming them in part for the housing bubble that led to billions of dollars in corporate and private losses.
As a shareholder-owned company and the largest supplier of mortgage funds, Fannie Mae guarantees mortgages that comply with its funding guidelines. Created during the Great Depression to provide affordable housing to families while building up a weak economy, it now helps to maintain the flow of funds available to mortgage lenders by buying mortgages on the secondary market, and then selling them as mortgage-backed securities to investors on the open market.
Freddie Mac was created in 1970 to prevent Fannie Mae from gaining a monopoly on the secondary mortgage market, and shares the same business model. Together, Fannie Mae and Freddie Mac guarantee about 50 percent of mortgage loans while working with lenders on the secondary market. Many U.S. homeowners are typically unaware when either company owns their mortgage loans at any given time.
As you will recall, it was Fannie and Freddie that bundled purchased mortgages into investments and sold them as A rated when in fact they were not. These debentures, comprised largely of poorly qualified loans to unworthy buyers, led to the financial collapse and eventual bailout of several Wall Street firms as well as Fannie and Freddie, both Government Sponsored Enterprises (GSE).
The market place appears to believe that GSE agency debentures carry an implicit guarantee from the United States government. This is due to the GSE's direct borrowing ability from the U.S. Treasury and the importance of the GSE's Congressional charters and missions.
Some feel the GSEs have an unfair funding advantage over publicly or privately held corporations, and that the amount of GSE debt and their corresponding investment portfolios pose too much risk to the entire U.S. financial system. Others believe the role the GSEs play in promoting homeownership, for example, justify their funding advantage.
Now it appears that they have outstayed their welcome. The disaster that was the financial crisis of 2008 lies largely at their feet if the president's position is correct. So what will their demise mean to mortgage borrowers? That remains to be seen but the president did state that the 30-year mortgage is important to consumers and suggested that private lenders take a larger role, while the Federal Housing Administration which guarantees loans. The National Association of Realtors agrees;
"The president said he supports the historic affordability role of the FHA, which is critical to first-time homebuyers. While we support the goal of maintaining the FHA as an affordable option, NAR believes the FHA should preserve access for all qualified middle class families.
"While we have concerns about specific FHA reforms, protecting loan limits and keeping down payments low, we believe recent bipartisan legislation introduced in the Senate is a good place to start. President Obama made good use of the bully pulpit in stating his commitment to protecting the dream of homeownership for all Americans."
No one can argue that the key to avoiding another market collapse is "well qualified borrowers." Who will provide the financing for them remains to be seen but it is unlikely that Freddie and Fannie will be doing it much longer.
Trust an expert...call a Realtor. Call your Realtor or visit www.cdarealtors.com to search properties on the Multiple Listing Service or to find a Realtor member who will represent your best interests.
Kim Cooper is a real estate broker and the spokesman for the Coeur d'Alene Association of Realtors. Kim and the association invite your feedback and input for this column. You may contact them by writing to the Coeur d'Alene Association of Realtors, 409 W. Neider, Coeur d'Alene, ID 83815 or by calling (208) 667-0664.