Sept. 13, 2008: Fannie and Freddie fall to foreclosure, but, still, lenders lend
I write this column at the beginning of the week, and it appears at the end of the week. My topics are usually timeless, but, if I turn my attention to current events, there's always the chance that I'll end up with my foot in my mouth.
Even so, the news that matters most in residential real estate this week is the takeover by the federal government of the Federal National Mortgage Association (FannieMae) and the Federal Home Loan Mortgage Corporation (FreddieMac). These two quasi-private corporations define the lion's share of the secondary mortgage market in the United States.
What does that mean? If you got a conforming loan for your home, it will have been sold into the secondary mortgage market in short order. FannieMae or FreddieMac would have guaranteed the loan to investors, this so your lender could have had a renewed supply of capital from which to make new loans. Federal Housing Authority and Veterans' Administration loans would have been guaranteed by those entities, and sub-prime (non-conforming) loans would have been marketed directly to private investors. The secondary mortgage market exists to keep loan originators liquid in a market where very few people keep their savings in banks.
Given the federal takeover, has the sky fallen on the secondary mortgage market? No, although things may be a little sluggish as the newly-installed management teams learn the ropes. But as San Diego real estate broker Jeff Brown says, "Lenders lend." There are still plenty of dollars chasing mortgages, so there will be mortgages chasing dollars. It's plausible that interest rates could even go down, now that the secondary mortgage market has a rich Uncle Sam to back its loans.
What is not so plausible is the notion that investors will suddenly abandon housing altogether. Things will shake out. The ideal situation would be for a new free-market clearinghouse for the secondary mortgage market to arise. A business like that could cherry-pick the strongest loans, those least likely to go into foreclosure, leaving the more marginal loans to the Feds -- the FederalExpress principle.
Greg Swann is the designated broker for BloodhoundRealty.com, a full-service Metropolitan Phoenix real estate brokerage. This article originally appeared in the West Valley regional sections of the Arizona Republic.
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