I come before you this Monday morning to express ignorance - beyond the usual ignorance I express in my musings thankyouverymuchforasking.
I don't get Fannie Mae and Freddie Mac. I'm willing to lay down some cash to bet that you don't either, unless you are a banker or someone else intimately involved in the financials market and money handling.
Now what follows is gonna be bloody confusing for a moment. I can't help that. But if you stick with me, I promise after the confusing bit I will be clear again. Well. As clear as I ever get.
We are told these two quasi-federal government agencies are on very intimate terms with some 90 percent of all new mortgages in the United States.
What does that mean? I can't get a straight answer. This article by the Motley Fool may help.
Here's a clip. "Fannie Mae provides a guarantee to these investors that they will receive timely principal and interest payments, no matter what happens with the underlying mortgages. If there are large numbers of defaults, Fannie Mae will have to make the investors whole. If there is a massive crash and defaults overwhelm Fannie Mae, it has an ace in the whole: your tax dollars. Even though the company's debt offerings clearly state otherwise, the financial markets believe that Fannie Mae's status as a government-sponsored enterprise implies that the government will provide full faith and credit for Fannie's debt. It is for this reason that Fannie Mae maintains a AAA credit rating, even though at a 78:1 debt-to-equity ratio it is levered many times what is allowed international banks. (Debt is defined as mortgages on its books plus the value of its guarantees.)"
Is your head spinning yet? Mine spun right out the door.
Now I can go back to being non brain-wobbling.
Being in the newspaper business, I run home foreclosures. I also see banks take a beating on a foreclosure. They lose money, in other words.
But according to what I read about F&F, these two agencies are supposed to insure the folks who issued the mortgage don't lose money. How? By taking money and paying the mortgage holder.
Where does F&F get that money? The money comes from taxpayers. We all lose in other words.
Now some in Congress are calling for the elimination of F&F.
HOORAY! Kill 'em to death. Get a stake and drive it through their hearts, decapitate them, burn them at the stake and scatter the ashes over Iran. Get taxpayers OUT Of taking care of private debts.
If F&F are done in, what does this mean to the 30-year mortgage?
Banks are going to be a LOT less willing to extend credit for 30 years, especially at today's interest rates, unless that loan is guaranteed.
The real estate bought with a mortgage is not enough of a guarantee. Foreclosed property often sells for less than the mortgage cost. Banks just want to get rid of the property.
This means shorter term mortgages, higher interest rates or variable interest rate loans.
None of which are conducive to putting people in homes.
Example - If you have a 90K mortgage at 7 percent for 10 years your payments are $1,149.14
The same loan over 30 years is a mortgage payment of $702.94.
This includes a small property tax and does not include insurance.
Banks are not going to lend money over 30 years at 7 percent. 12 percent maybe.
Why the change in interest rates? Bankers plan long term. Over the past 30 years I have seen mortgage rates as low as 3 percent and as high at 17 percent.
Over 30 years you can bet bankers will be looking for inflation to increase, meaning they'll need to change more interest to make a profit.
Banks are in the business of making money, not making sure people have a place to live. Banks are incredibly UNresponsive to demands of consumers with less that perfect credit - i.e. pretty much everyone. Banks may argue this, but I tell you to look at the fine print and you'll see how unresponsive they actually are.
However, banks indeed are in the business of making money. That means they do have to loan money and loan it at rates and payments people can afford and are willing to accept. If enough people say no, banks will change their policies or go out of business.
Home loans won't go away. 30 year mortgages will get a more expensive, which means more people either won't be able to buy a home or will be forced to save more to buy a home.
Then again, banks may start lending for mortgages the way Islamic financial institutions do. And that one is WAY more confusing, but history also shows it's a lot more stable too and it does turn a profit for the lender.