Fannie and Freddie on the Rocks?

Fannie and Freddie on the Rocks?

There was considerable market turmoil Friday as Washington and Wall Street began coming to grips with something everyone in the mortgage industry has known for many months: Fannie Mae and Freddie Mac, the two privately owned companies who provide money for mortgage loans by purchasing existing loans, bundling them and selling them to investors as mortgage backed securities (bonds), are in trouble. What exactly happened this week that made everyone acknowledge this elephant that has been sitting in our kitchen is unclear, but make no mistake about it, it's there, and some of the proposed solutions are so repulsive we may decide to leave the elephant there and decorate around him.

You may not know much about how our nations economy actually works (who does?), but try this number on for size: Fannie Mae and Freddie Mac either hold, or back, 5.3 trillion dollars of mortgage debt. Remember the good old days when a major disaster such as the S&L bailout was discussed in terms of billions of dollars? Peanuts! We have advanced as a civilization to the point that today's oopsies deal in trillions of dollars.

So we are talking big money here. The question is what, if anything, needs to be done. The suggestions range from doing nothing, to a slight change in diet, such as cutting the dividends these companies pay their shareholders, all the way up to summary execution of the patients, accomplished by a government takeover of the companies.

While something between these extremes will most likely evolve, most likely some type of government loans or guarantees, the effect of any treatment is going to be detrimental to the consumers. Lending guidelines may be further tightened, and more borrowers may be forced to use bank loans, not a pretty option when you consider that most banks don't want to extend loans at 30 year fixed rates, and most banks don't want to commit to long term mortgage lending anyway.

Let's hope Fannie and Freddie can patch up their problems…mortgage loans won't be the same without them.

Carl Trawick is a Mortgage Specialist and Licensed Mortgage Broker with the firm Access e*Mortgage. He can be reached at 904-343-1145 or ctrawick@nefcom.net