As you may know, recently control over Fannie Mae and Freddie Mac was assumed by the federal government.  As an insider to the mortgage industry and an observer, here are some of my thoughts on this move.

Pros: 

This needed to be done.  Both the stock market and the bond market have been dealing with uncertainty that mortgage notes will continue to be created and/or serviced.  This speaks diresctly to the strength of our banking industry as well as a consumer's ability to even be able to acquire a home loan.  During these times where qualifying for a home loan has been arguably more difficult than just about any time in the last 15 years, the kind of uncertainty that comes with secondary markets not being able to fund mortgages was making the entire economy nervous at all levels. 

FNMA and FHLMC pay lenders or banks for the mortgages that they have already originated.  Whether that comes directly from them (retail) or through a mortgage broker like me (wholesale), the ability to sell that loan allows the lender to go back out to consumers and offer another one.  Without the ability to sell loans to Fannie and Freddie, banks and lenders are limited on the number of loans they are able to originate based on the amount of deposits they have.  By shoring up the confidence in Fannie and Freddie, the Treasury Department has created certain stability in an uncertain real estate market and economy.

In turn, this should make mortgage guidelines more stable as well.  By creating confidence in the mortgage secondary market as a whole, hopefully lending guidelines will stop their "conservative" slide and become more reasonable again, as they should be.  Making solid lending decisions can be a difficult process, but it is more difficult in an uncertain economy.  With this added measure of stability, we should see some more reasonable underwriting guidelines slowly return to the market making it easier for those who meet credit requirements to obtain market rate mortages!

Cons:

We are not sure about the long-term consequenses of government control of these entities.  I am always skeptical of the government stepping in and bailing out big business.  Wall Street is mostly to blame for this fiasco, in my opinion and we needed to clean house, however, they do not deserve to be rewarded and bailed out for their poor lending decisions.  This blurs the line between the public and private sector, however, the line it seems has always been blurry with regard to these "quasi-governmental entities".

Will we see greater regulation of our industry?  Some sweeping changes have already occurred, some of which I agree with, some I do not fully support, but over regulation typically is worse for the consumer, not better.  Will the Treasury institute tougher servicing requirements and therefore make it more difficult for lending institutions to extend credit to more consumers?  If Fannie Mae and Freddie Mac are going to be seen as the industry standard, how likely are we to see some of the more agressive, un-insured programs come back.  I agree that there was an over abundance of "stated" income documentation loans in recent past, but is the answer to do away with them altogether?  I personally know many consumers who now will not qualify for financing at all regardless of their outstanding asset and credit profile and years of perfect payment history.

At present:

Confidence in the mortgage and real estate markets has grown.  Rates seem to be dropping and stabilizing and though they will continue to be volitile, this is one big factor that will be much less of an issue.  The takeover has been very good this past week in taking this worry off the plate of Wall Street investors and lending institutions so that they may go about their business more easily.  Lenders may continue to focus on writing quality paper (loans) and they know that there will be a source of liquidity (money) for them to continue to draw!  Foreclosures are still the "Wild Card" in this economy and until the majority of lenders who have loans in default are able to get them off their books and/or complete the process, we will continue to see major instability in the mortgage and real estate industries. 

The future:

We must continue to push for a greater flow of credit to the consumer to keep our economy and the real estate market moving forward.  An increase of volume of purchases will cause home equity to rise and this crisis to come to a screeching halt.  Our industry must take another look at borrowers with a solid credit and pay history profile for self-employed stated loans, jumbo mortgages as well as creating some more reasonable options for our credit-challenged borrowers. 

We must be watchful against an overtihtening or excessive regulation by a Treasury Department controlled FNMA/FHLMC. 

Finally, borrower confidence must continue to improve so that an irrational fear of foreclosure does not contine to be an overriding factor in lenders making otherwise intelligent credit decisions.  In other words, your average homeowner has nothing to fear about losing their home to foreclosure.  The lack of equity and limited credit availability has been a relatively brief occurrance in this market that we will recover from and will cease to be an issue for the majority of consumers.  Many markets are already on their way out of this and hopefully soon the rest will follow.

For more information or questions about topics discussed here, please e-mail me at the link below!

Michael Nielsen, Mortgage Broker

michael@mplsfunding.com