Yesterday the government seized control of Fannie Mae and Freddie Mac. For those in the know, this is huge news, but for those who think this sounds like an episode from the Beverly Hillbillies, let me help fill you in.
Fannie Mae and Freddie Mac provide a secondary market for banks and other lending institutions. Fannie and Freddie only buy loans that meet their high financial standards which are called conforming loans ($729,750 and under in San Mateo County). They retain some of these mortgages as investments and the rest they package together and sell off to investors as mortgage backed securities. Fannie and Freddie currently own or guarantee more than $5 trillion in mortgages or almost half of the outstanding mortgages in the U.S.
As the housing crisis continued this year, so did the default in mortgages. Fannie and Freddie have posted billions of dollars of losses which has restricted their ability to raise money and buy additional mortgages. Because of this, the banks and other lenders have tightened their standards which make obtaining a home loan harder to come by.
The Government has agreed to pump billions of dollars into Fannie and Freddie and will assume responsibility for their debt. The hope is that our tax dollars will help stabilize the mortgage crisis and boost the housing market.
It will be interesting to see how the mortgage markets will react. I could see a potential increase in rates over the next few days and weeks as investors try to grasp the reality of these new government owned giants. As the dust settles, there is a potential for rates to drop to historic levels closing out the year and carrying into the New Year.
Is this the spark we are looking for or could this be the spark that burns down the house? I would love to hear your thoughts!
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Chris Williamson is a Mortgage Advisor with Mortgage California specializing in San Mateo Mortgage.
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