What Does the Fannie/Freddie Takeover Mean for You?

Posted by: Lauren Young on September 8, 2008

The Federal National Mortgage Association (FNM), nicknamed Fannie Mae, was a depression-era institution created to make homeownership affordable for the working-class. Freddie Mac (FRE) was created in 1970 to provide liquidity, stability and affordability to the housing market.

Today, Fannie and Freddie guarantee or own over half of U.S. mortgages valued at $5 trillion. But with the credit crunch, too many of those loans started going into default, hurting the companies’ financial reserves and driving up borrowing costs.

Now that the U.S. government has taken control, here’s what should happen:

What Will Happen
Mortgage rates will drop. The 30-year fixed is at 6.08% today, more than a quarter of a percentage point lower than Friday, according to Bankrate.com.

Update: Rates took a big dive downward on Monday, with the national rate for a 30-year fixed mortgage at 5.75%, according to Zillow Mortgage Marketplace. At a state level, the 30-year fixed rate mortgage rate in Arizona saw the most significant drop from 6.35% to 6.13%, while Michigan saw the smallest decline from 6.30% to 6.25%.

The takeover will shore up financing for buyers with stellar credit. (“Stellar” is defined as folks with credit scores above 700.)

It will hurt performance in mutual funds that invest in the stocks of Fannie and Freddie. It will also help funds that invest in their debt.

What May Happen
The takeover could have a domino effect: It could help stabilize housing prices, which have been falling, by allowing people with weaker credit to buy homes. (Home prices have fallen almost 16% nationally in the past year, according to the S&P/Case-Schiller index.)

It may stem the tide of foreclosures.

What Won’t Happen

The takeover will not cut rates on jumbo mortgages. A jumbo mortgage is defined as a loan of more than $417,000 in most parts of the U.S. But jumbos are much higher in expensive housing markets. For example, a jumbo loan is up to $729,750 in the Los Angeles area.

It will not reduce home equity loan or line of credit rates.

It will not immediately eliminate fees for borrowers with weaker credit histories. Fannie Mae recently announced higher borrowing costs for loans to borrowers with weak credit. Applicants with credit scores between 640 and 659 who are putting down 15% to 20% now pay an additional 2.25% charge. Mortgage experts are hoping these fees will be dropped as the dust settles.

Reader Comments

Jim

September 8, 2008 2:39 PM

What happen to average tax payer?

Are we helping the home owners who already bankrupt or just helping Fredie and fanie Investors?

Peter

September 8, 2008 2:51 PM

Average tax payer are screwed again, no surprise there...

It wouldn't help home owners who already bankrupt because they are already dead in the water and have a terrible credit history.

It wouldn't help Fannie and Freddie stock investors which are mostly americans, but it will help bond/debt investors such as Chinese, Japanese and Russians.

Squeezebox

September 8, 2008 3:26 PM

Bailing out Fannie and Freddie means that loans will be available throught the FHA for years to come. Don't think the executives will get off Scott-free. There's gonna be a witch hunt in the finance sector, and the executives are likely to be prosecuted for buying loans that they should have known were bad. The banks will also get spanked because they recklessly made loans that could be bad. Without Fannie and Freddie, banks wouldn't be able to make loans with less than 50% collateral to homeowners. That means practically everyone would be renting, unless they inherited a home.

Bob

September 8, 2008 3:34 PM

Jim Rogers said it exactly like it is: USA right now is more communist than China. We have socialism for the RICH. We rob average tax payers to bail out rich investors, big time, again and again.

Glenn McLain

September 8, 2008 3:48 PM

Is Fanny mae and Fred mac dead in the water or would it be a good long term investment now?
glenn mclain

AllieMac

September 8, 2008 4:24 PM

How is the average (and above-average) home buyer not helped by lower mortgage rates?! My husband and I are about to purchase a $350k home with 20% down and we have "stellar" credit -- we are above-average home buyers and are THRILLED to see the rates drop. Some of you are just mad that you bought at the wrong time, i guess.

Bryan

September 8, 2008 5:07 PM

My question is where is the money coming from to pay for this bailout. We our over 9 trillion in debt already.

I guess we will just print more money to pay for this. Making everyones $ worth less than it was before this.

Nice.

Bryan

September 8, 2008 5:09 PM

My question is where is the money coming from to pay for this bailout. We our over 9 trillion in debt already.

I guess we will just print more money to pay for this. Making everyones $ worth less than it was before this.

Nice.

DollarBill

September 8, 2008 5:20 PM

We too are happy to see the government step in to help the housing market . Better late than never .It will help people who should be homeowners be homeowners NOT flaky speculators .With housing prices down 30% it is an excellent time to jump in to a house you will live in ,NOT some flipper who wants to make a buck.When rates are in the mid 5% rate you who have credit scores better than 700 enjoy the feast!You'll get a great deal and be enjoying a good home better than renting.In 2 years you will be happy you did. Personally I would rather see the government spend money this way than in the bottomless rat hole in Iraq!This 'bailout' as it is called will benefit millions of financially responsible people !

Scott

September 8, 2008 5:25 PM

Problem is the Treasury has a lot of other players lining up for a bailout. The automakers, the FDIC, that pension guaranty outfit, perhaps the airlines as well. At some point even the US Treasury will be streched to the breaking point and there will be no one to bail them out.

Keagan

September 8, 2008 5:36 PM

This debt won't be paid off in our life time.. our kids, grandkids, and beyond will inherit this debt, along with global warming... what a future.....

hooligan

September 8, 2008 6:09 PM

Well, the US Government has just invested in a pair of companies who single handedly recyled trade and petro dollars into a boom that took the country out of the dot.com excesses. So the story is this, there will be a company that will have mortgages on assets of 5 trillion that may be worth somewhere between 5 trillion (if the market recovers to the past peak) or a reflection of the 15% fall in house prices of the last year. Worst case, the taxpayer/US Government/voter has been given a chance to earn 10% on every loss (capital injection) required. If the assets are never sold by the homeowners (all of whom are voters) then there is no problem. Unless of course you consider whether the homeowners can service the mortgages, or simply walk away. If the market was right before, then finance 101 will tell you that it does not matter how you finance assets. The assets are worth what they are worth. If the market is rational in removing more than half the previous increase in house prices and houses are worth 15% less than the mortgages that have financed them (the market already says that FRE and FNM have only a little call option premium in them) then the value of the assets that the US Government/voter has taken on is 5 trillion in mortgages times 15% or a loss of 600 billion. The Government/voter has also said that it is limited to a 100 billion of equity injection in each. So let's see if financing an increasing equity investment by saying that all equity losses = fresh equity investment amounts to a hill of beans or not. Oh and by the way, I think that the odd 1.5 trillion in CDS protection bought at margins of say 0.75% to 1% that is now worthless ought to mean market payers that bought this protection will now have to write a cheque for up to 15 billion in the next few days. This is the moral hazard of US Government/voter intervention. I think a look round the world at nationalisations of energy industries, car and airline industries reveals that the original estimates of the costs are out by a factor of up to 10 by the time all anciallry costs are calcualted. I seem to remember the S&L crises was the pre-cursor to the growth of FRE and FNM and that only ten years ago their combined assets were 500 billion, not 5 trillion.

Bill

September 8, 2008 9:22 PM

Whatever happened to the free market?
I voted for a conservative and look what
we got, Karl Marx with an R behind his name.
Vote for me an I promise, forty acres and a mule, free health insurance, low
mortgage rates, low gas prices, low cost
child care, free dental care, low cost
abortions, cheap cars from China, and a
Wal-Mart on every corner.
The one thing that will not be free is
freedom.

Policywank

September 8, 2008 9:23 PM

Forget whether this helps individual buyers or individual taxpayers. Do you folks have any idea what would happen to our entire economy if Fannie and/or Freddie failed? We would have a depression, not a recession. Both of these organizations really are "too big to fail" as the saying goes.

Ralph

September 8, 2008 9:39 PM

The people how were given loans they can't pay back a done for. None of this will help them. All it will do is allow mortgage lenders to give out new loan to a new group of folks they shouldn't. They will make millions, home prices will become speculation driven again and the tax payer gets the bill. P.S. When Fannie Mae becomes profitable again I can here all those Wall Street/Republican types clamoring for the government to turn it back to the "Private sector" to run because they should not be in the business of making money.

PacificGatePost

September 9, 2008 2:24 AM

OMINOUS SIGN BEHIND PAULSON’S ACTIONS

http://pacificgatepost.blogspot.com/2008/09/secretary-paulson-reasures-foreign.html

And as usual the taxpayer is on the hook in the biggest bailout ever, and forever after that.

Pat

September 9, 2008 2:32 PM

IDC about the average tax payer. IT is all about keeping the money in the hands of the rich and powerful. I get screwed by higher taxes when i should get rewarded for being hardworking and successful

hooligan

September 9, 2008 2:42 PM

Policywank...my point was they have already failed..gone bankrupt, deceased, worthless. There is a book of assets that will generate a return..and I'm pretty sure that anbody who is not involved with the broken banking system would be able to make more money out of a 5 trillion book than a government because they are not tainted by the moral hazard of taking from poorer taxpayers to pay richer tax payers.

ReFiGuy

September 10, 2008 7:58 PM

Guys, just wanted to thank all you taxpayers for the bailout and saving me a little over $1,000 a month on my mortgage. I took your bailout as an opportunity to refinance and pay down my principal to fall under new conforming jumbo limit. You can be sure that I will put the extra bling to good use.

Viva USA! Socialism rocks!!!

harry houdini

September 10, 2008 9:11 PM

The whole process is nothing more than a shell game. Move the risk from banks to the GSE's to the taxpayers. There really is no risk for the rewards that management has raped from these companies for years. US home ownership has averaged 65% of all family units for more than 60 years, and now it is 68%. That 3% over weight has forced banks to writedown $510 billion so far, and now the taxpayer is footing much of the bill. The executives and boards of these companies, including the banks and mortgage companies, should be put on trial for gross negligence. What a fraud! This whole mess looks, smells, and feels like another Enron to me. When will we take back this country?

elo

September 14, 2008 2:51 PM

I feel like I don't have enough background in economics to have a sense of what sort of disaster might ensue if a bailout didn't happen....although James Surowiecki wrote a piece in the New Yorker back in March, questioning the high value that Americans place on home ownership.

If Fannie and Freddie do continue to exist in some form (which seems inevitable, at least for now), it would behoove them to re-label themselves..

Dr. Tantillo ('the marketing doctor - Tanillo's full post

jme

September 18, 2008 12:09 PM

Interesting discussion, but why are we not talking about the Clintonian policies aimed at getting minorities houses. They should have houses but only if they can afford them and meet the proper criteria. These kind of self serving policies, aimed for approval ratings, forced so many lenders to take on bad loans. When lenders take on bad loans and DO NOT get their money, is there any wonder why we are in the situation we are in? I know the fallouts are the hot topic and of great concern, but why don't we talk about the catalyst that started it all. Of course we know why.

Rich

February 17, 2009 1:44 PM

The average home price in America is about $200,000. If that represents the average American home buyer, then Fannie and Freddie should never be allowed to give out mortgages higher than, say, $150,000. For the sake of future speculation, about 80% of the average American home price or so. That way they have to stick to their "mission" of helping out struggling home buyers. I guarantee you, if you are trying for a mortgage of $200,000+/-, you are not struggling and are not the average American home buyer, at least not if you intend on paying for that $200,000 and living a decent life also.

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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