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If Fannie and Freddie fail and shut down, you will not be able to get a mortgage for the next several years. This is not an exaggeration. Mortgage lenders dep

by ctkrohn 18y ago

If Fannie and Freddie fail and shut down, you will not be able to get a mortgage for the next several years. This is not an exaggeration. Mortgage lenders depend on the ability to sell their mortgages to Fannie Mae; your average lender doesn't have enough resources to keep all of them on its balance sheet. A huge number of investors buy the mortgage backed securities Fannie Mae issues because it's one of the biggest, most liquid, most transparent, and safest markets in the world. (And traders like me depend on it for their livelihood...) If that market disappeared, mortgage lending in the US would freeze.

ajkirwin 18y ago
What, so people.. might start to use smaller providers, or perhaps as things used to be, make agreements with the sellers themselves in a kind of rent-to-buy agreement? Good lord, whatever will happen. Poor, POOR traders. Frankly, I could give less than two shakes on whether you depend on it for your livelihood. It's besides the point. Their primary business is to help people get homes. Or at least, it should be. Not to make money for traders.
- ctkrohn 18y ago
  Ah yes, the difficulty of sarcasm over the Internet. All kidding aside, you're absolutely right that Fannie and Freddie shouldn't care about whether banks earn money trading mortgage bonds. I didn't mean to imply that banks, traders, or any other mortgage market participants deserved special treatment from the government, because they don't. Fannie Mae, Freddie Mac, and to a lesser extent Ginnie Mae play an important role in the mortgage market, and it's worth thinking twice before saying they should be allowed to go under. The market in their mortgage-backed securities (MBS) has led to substantially lower mortgage rates, to easily refinanceable mortgages, to a wide variety of types of mortgages: fixed year mortgages of all time periods, ARMs, balloons, etc. And while things were certainly taken too far, the government mortgage agencies allowed many deserving homeowners to take out mortgages that individual banks wouldn't have been willing to give. I don't think it's in the best interest of the country to go back to the old model of mortgage origination. That being said, I do think that Fannie and Freddie should really change the way they do business. Right now they perform two roles: that of a monoline (i.e. an insurance company), and that of a REIT. The monoline is what's important: by buying mortgages, taking a cut of the monthly payments as an insurance premium, and then packaging the mortgages in easily tradeable securities, they promote a smoothly functioning mortgage market. The REIT part is where they borrow money at extremely advantageous rates and invest it in their own MBS, like the original article talked about. The idea behind letting them operate as a REIT is that by buying large amounts of MBS, they would support their price, promote lower primary mortgage interest rates, and make housing cheaper for the nation as a whole. That's fine as far as it goes, but there should be stricter requirements on the size and riskiness of its portfolio. Earlier this year when private mortgage funds like Carlyle and others were blowing up, Fannie and Freddie should have been required to raise more capital and reduce purchases of new mortgages. But they weren't, and now we're in the mess we see now.

by ctkrohn 18y ago

ajkirwin 18y ago

What, so people.. might start to use smaller providers, or perhaps as things used to be, make agreements with the sellers themselves in a kind of rent-to-buy agreement? Good lord, whatever will happen. Poor, POOR traders. Frankly, I could give less than two shakes on whether you depend on it for your livelihood. It's besides the point. Their primary business is to help people get homes. Or at least, it should be. Not to make money for traders.

ctkrohn 18y ago
Ah yes, the difficulty of sarcasm over the Internet. All kidding aside, you're absolutely right that Fannie and Freddie shouldn't care about whether banks earn money trading mortgage bonds. I didn't mean to imply that banks, traders, or any other mortgage market participants deserved special treatment from the government, because they don't. Fannie Mae, Freddie Mac, and to a lesser extent Ginnie Mae play an important role in the mortgage market, and it's worth thinking twice before saying they should be allowed to go under. The market in their mortgage-backed securities (MBS) has led to substantially lower mortgage rates, to easily refinanceable mortgages, to a wide variety of types of mortgages: fixed year mortgages of all time periods, ARMs, balloons, etc. And while things were certainly taken too far, the government mortgage agencies allowed many deserving homeowners to take out mortgages that individual banks wouldn't have been willing to give. I don't think it's in the best interest of the country to go back to the old model of mortgage origination. That being said, I do think that Fannie and Freddie should really change the way they do business. Right now they perform two roles: that of a monoline (i.e. an insurance company), and that of a REIT. The monoline is what's important: by buying mortgages, taking a cut of the monthly payments as an insurance premium, and then packaging the mortgages in easily tradeable securities, they promote a smoothly functioning mortgage market. The REIT part is where they borrow money at extremely advantageous rates and invest it in their own MBS, like the original article talked about. The idea behind letting them operate as a REIT is that by buying large amounts of MBS, they would support their price, promote lower primary mortgage interest rates, and make housing cheaper for the nation as a whole. That's fine as far as it goes, but there should be stricter requirements on the size and riskiness of its portfolio. Earlier this year when private mortgage funds like Carlyle and others were blowing up, Fannie and Freddie should have been required to raise more capital and reduce purchases of new mortgages. But they weren't, and now we're in the mess we see now.