* * * * HARD CORE REAL ESTATE TALK * * * *
GOOD GRIEF! What's all the whining about? All the government did when they became the conservators of Fannie (and Freddie) was what the public and lenders across the nation (not to mention foreign investors) always relied on the government doing, paying the bond holders of MBSs if Fannie and Freddie failed to do so.
Fannie Mae Mission
"We are a shareholder-owned company with a public mission. We exist to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market.
Fannie Mae has a federal charter and operates in America's secondary mortgage market to ensure that mortgage bankers and other lenders have enough funds to lend to home buyers at low rates. Our job is to help those who house America."
MBS: Bonds backed by interests in a pool of mortgages. The income from these bonds comes from the cash flow from the mortgage pools.
NEWS FLASH: When home owners default on their mortgage payments, the underlying bond ceases to pay the bond holders.
THE LIFE OF A MORTGAGE BACKED SECURITY:
The chronology from 2004 to 2007.
Consumer decides to buy a home.
Consumer borrows money with an ARM starting at 4.5% to buy home.
Consumer secures loan with a mortgage on home.
Mortgage company lends money.
Mortgage company "pools" many mortgages and sells them to Fannie.
Fannie bundles many mortgages, chops them up into small pieces and sells the pieces as bonds.
As the home owner makes their mortgage payments, the cash flow from many mortgages provides cash flow to the owners of the MBSs or bonds.
Consumer's ARM mortgage resets to 6.5%
Consumer defaults on mortgage payments.
The "cash flow" from mortgage repayments to MBS bond holders is reduced.
The income to MBS bond holders is reduced.
Fannie and Freddie continue to make payments on the MBSs.
Fannie and Freddie run out of money.
The government does what the market had always relied on the government doing. They took over the BMS payments to the bond holders.
Fannie will continue to buy mortgages with money from the government.
The mortgage companies will continue to lend money knowing that they can sell the loans to Fannie and Freddie.
The consumer will continue to buy homes because they can continue to borrow money.
The "risk premium" on interest rates may be reduced and interest rates may be reduced.
So, what's all the angst about? All the government did was what Fannie and Freddie and the investment banks and the consumer and the lenders and the rest of the world relied on the government doing.
The government bailed Fannie and Freddie out and will send the bill to the American tax payer.
The first invoice was this week with the promise of $5,000,000,000 as the first installment.
Courtesy, Lenn Harley, Broker, Lenn Harley, 800-711-7988.