September 17, 2008

Fannie Mae and Freddie Mac

By Senator Lena C. Taylor

As Chair of the Senate Committee on Judiciary, Corrections and Housing, I am eagerly observing the recent takeover of Fannie Mae and Freddie Mac by the federal government.   The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, and The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, were started in 1938 and 1970, respectively.  As the nation’s two federally chartered but privately or share-holder owned mortgage finance companies, they are prohibited from originating loans, but can purchase and/or secure loans made by others.  Intended to increase home ownership for low to moderate and middle income families, Fannie Mae and Freddie Mac have been a steady hand in the assistance that many needed to attain a symbol of the “American dream”.      

However, due to a number of factors, Freddie Mac and Fannie Mae have seen nearly 1.2 million home loans either foreclosed or in the process of foreclosure.  Poor decisions, over saturation of the housing market, and dire economic downturns, have all lead to serious consequences.  Earlier in the year, the federal government attempted other stopgap measures to aid the two industry giants, but despite these efforts, as of August 2008, shares of both Fannie Mae and Freddie Mac have tumbled more than 90% from a year ago.  This decision did not come easily and is unprecedented.  Therefore, it is difficult to predict the outcome of this move.   

We know for sure that if you have a fixed-rate mortgage, very little will change. If you are considering purchasing a home or refinancing your mortgage, the government’s takeover may settle the market. This could lead to a drop in mortgage rates initially, but the drop may not last long enough or be large enough to stop the decrease in the prices of homes. The Treasury secretary, Henry M. Paulson, Jr. stated that the two companies would be examining the fees they charge banks for securing their loans. If the fees are reduced and banks pass these savings to their customers, you could receive lower mortgage rates. However, since the federal government is now running Freddie Mac and Fannie Mae, they may change the rules for the types of loans they will buy. This includes rules for credit scores and down payment requirements.

Many experts feel that home prices are unlikely to fall and the rising unemployment rate and the general state of the economy have left a large number of homes for sale. At the same time, the government has no interest in foreclosing on a ton of houses, and both Freddie Mac and Fannie Mae have offered banks some benefits in order to get them to modify some of their practices.   It is also likely that more difficult rule changes will be made after the November elections.

If you are facing foreclosure or need help, please contact ACORN.org or call 414-727-2776.