Fannie Mae and Freddie Mac after the bail out and what it means for the homebuyer
Fannie Mae and Freddie Mac, who were regulars in the headlines back in 2008, have maintained a relatively low profile as of late. However, just because the two haven't been making headlines during the more recent years does not mean that they have not been busy. In fact, quite a lot has happened since the bailout of 2008, especially involving Fannie Mae and Freddie Mac.
An Overview of Fannie Mae and Freddie Mac
Started in 1970, the Federal Home Loan Mortgage Corporation, or more commonly referred to as Freddie Mac, is a corporation sponsored by the U.S. government. Fannie Mae, on the other hand, was created several decades earlier during The Great Depression, is larger in size than Freddie Mac, and has been a publicly traded company since 1968. Both rival government-sponsored enterprises (GSEs) were in essence created to expand the secondary mortgage market in the country.
Changes Since The Bailout
Since the government bailout of 2008, there have been numerous changes to the structure of mortgages offered in the U.S., most notably those affecting Freddie Mac and Fannie Mae. One stark change has been the shift in guarantee fees charged to banks/lenders while refusing to guarantee the riskier loans. As a sort of chain reaction, by charging a premium in fees to banks and lenders, these two enterprises have consequently tightened the offering of mortgage loans, essentially eliminating all of the riskier mortgages. Unfortunately, the subsequent increases in guarantee fees that coincide with such a shift have been passed down to borrowers in the form of higher mortgage interest rates, opposed to being fully incurred by the bank/lender.
The Fallout From The Bailout
Private investors have historically steered away from buying mortgages not guaranteed or "backed" by the government. Consequently, this leaves Fannie Mae and Freddie Mac with the burden of picking up nearly nine out of every 10 home loans. This, however, has not been seen without a response, as government officials in turn are now looking to limit the maximum size of home loans that can be guaranteed by Fannie Mae and Freddie Mac. In doing so, the hope is that the move will entice private lenders into the mortgage market and take some of the burden off of the government.
In the immediate, putting a cap on the size of mortgages may make it more difficult for some buyers — likely those with less favorable terms — to finance the purchase of a home. However, the hope is that in the long term, this will shift toward a more balanced mortgage market. To ease some of the potential homebuyer's concerns, these talks of changes with Fannie Mae and Freddie Mac are unrelated to the FHA, which allows borrowers to make a down payment that is as low as 3.5% and offers varying interest rates and varying limits on loan sizes.
More Recent Developments
After receiving federal bailout money back in 2008, both aforementioned GSEs have urged banks to repurchase mortgages that flopped during the housing market crash. Forcing banks to do so has also been carried out under certain circumstances, which mainly include loans being written under false pretenses. More specifically, if a loan is underwritten with terms that are unfeasible, and/or it is deemed that the borrower could not afford the terms to begin with, then the bank could be forced to buy back the loan. Most recently, it has been reported that banks such as Wells Fargo, CitiGroup, and Bank of America have all made settlements to pay either Freddie Mac or Fannie Mae stemming from claims during the downturn in the mortgage market.