Posted on October 1, 2009 by IC N in Residential
Tags: Real Esatte Market
There’s a lot in the news today about the financial crisis, the mortgage crisis, the housing bubble… And the list goes on. So here’s a brief explanation of the major players and what they do. Having a solid understanding helps investors see what is going on underneath the surface. With that knowledge, a savvy investor can figure out where the market is headed and adjust their business accordingly.
So who are Freddie Mac, Fannie Mae and Ginnie Mae?
Sounds like a trio from the Grand Ol’ Opry. Instead they form the underpinnings of our mortgage market.
Freddie Mac stands for The Federal Home Loan Mortgage Corporation (FHLMC), a government sponsored enterprise (GSE) buys mortgages on the secondary market and pools them together to sell to investors. It was founded in 1970.
Like Freddie Mac, Fannie Mae is a publicly traded, stockholder-owned government sponsored enterprise. This is the common acronym for the Federal National Mortgage Association. Fannie Mae is considerably older than Freddie Mac; it was chartered by the federal government in 1968, but founded during the Depression in 1938. Fannie Mae securitizes mortgages to make funds more readily available to the public, and, like Freddie, it buys mortgages on the secondary market.
Ginnie Mae is the Government National Mortgage Association (GNMA), a government-owned corporation overseen by the U.S. Department of Housing and Urban Development. Ginnie Mae bundles FHA-insured and VA-guaranteed loans, and mortgages from the Rural Housing Service and from the Office of Public and Indian Housing to back securities for private investors. Like Fannie Mae and Freddie Mac, the investment income funds additional mortgages that can be lent by banks and mortgage companies for qualified borrowers.
By opening up mortgages to securities markets they served to provide a much larger pool of funding for Lenders to use in approving mortgages and are partly responsible for the easy availability of mortgages during the long housing market boom earlier in the decade.
When the mortgage crisis hit these quasi government corporations suffered massive losses as mortgages defaulted. Fannie and Freddie, like many banks, were over-leveraged when the housing market crashed. They were no longer able to buy or sell mortgage-backed securities leading, deepening the crisis.
On September 7, 2008 the Federal Housing Finance Agency put Fannie and Freddie in federal conservatorship. Now Fannie Mae or Freddie Mac own or guarantee at least half of the $12 trillion U.S. mortgage market. Ginnie Mae was not included in this conservatorship.
The FHFA added more funding to shore up the guarantees of the mortgage backed securities offered by Freddie Mac and Fannie Mae. This federal agency assumed the role of Board and management for the two GSEs, and it selected new CEOs for each of these companies and lowered their compensation packages. Freddie and Fannie are now not allowed to lobby Congress. Common and preferred stock was eliminated to save costs. The relationship with the U.S. Treasury was strengthened to insure that Fannie and Freddie will remain liquid.
Fannie and Freddie remain highly leveraged, and their securities are still seen as risky. If interest rates rise short term, then the profitability of the securities will be reduced. Further, the housing market is still weak, and default is still a very real risk for some of the pooled mortgages.
For a good summary of the risks still faced for investors of Fannie and Freddie mortgage-backed securities check out the Congressional Research Service Report RS 22916 (July 15, 2008), “Fannie Mae’s and Freddie Mac’s Financial Problems: Frequently Asked Questions.”