Sorting Out Fannie and Freddie and What it Means to You

It's late in the afternoon and I'm still not done reading all the stories out there about Fannie and Freddie. So many stories and so little time. Unless you've been out in the cave over the weekend, by now you know that the two are no longer operating as independent quasi-government corporations. Both now are under the wings of the Feds, in legal terms - conservatorship (outline of plan, here).

Along with it, here is the list losers with the take over: Stockholders. Preferred shareholders. Mutual funds. Taxpayers. Per Housing Wire, Fidelity held some $1.5 billion of now worthless shares and Legg Mason bought the 30 million shares a week before the Feds put them into conservatorship. Ouch. More losers, here.

With the bailout, we are looking at different scenarios at play that will affect consumers. Per New York Times: 1) mortgage rates, 2) new deals on old loans, and 3) new rules on new loans.

Here is the thing.

• For old loans. If you're holding fixed-rates, you're going to be okay. Because nothing is going to change.
• Those in foreclosures proceeding, not sure if Feds willing to bend the rules a little bit more since Fannie and Freddie have already give incentives to service loan companies to modify their loans. How much further down the line the new boss willing to bail out home owners on the hook for foreclosures - is anyone's guess.
• For those planning to buy (same thing with new loans), the interest rate you pay depends on what kind of loans Fannie and Freddie will buy. Some say interest rates will be lower.

Via NYT.

The private mortgage securitization market is dead. If banks make home loans that will not be purchased by Fannie or Freddie, or guaranteed by the government in some other way, such as the Federal Housing Administration, the banks must hold them on their own books until they are repaid. Banks are reluctant to do that.

In recent months, Fannie and Freddie raised the fees they charged to purchase or guarantee loans. That raised the cost of mortgages, and angered some banks. But the increases were seen as necessary, given the increased borrowing costs for Fannie and Freddie. That is one reason mortgage rates have not fallen in line with other interest rates. (emphasis added)

That's why the interest rate question for new loans is the $64M question. It's not clear how the underwriting rules will affect new loans and its interest rates. 

There are still unanswered questions.

On a positive thing. Fannie and Freddie deal with conventional loans which requires higher down payment a minimum of 5%. No worry. We still have FHA as an financing option to depend on. By October 1, FHA requires a 3.5% DP - and no DP assistance is allowed. DAP (short for down-payment assistance program is eliminated with the passing of Housing bill). In our region, FHA loans make up about 20% of sales transaction the past month.

Bottom line, either way if you are planning to buy after October 1, make sure you have more money saved up for your down-payment. You still can ask for closing costs assistance from sellers. But, the DP  has to come from your pocket. No more assistance via FHA loan available until at least until Congress tacks it into a new legislation sometime in the future.

And, please don't count on the tax credit money that you'll eventually receive after filing your taxes next year - if you owe more tax - because the money is not up-front.

Technorati Tags: fannie mae,freddie mac,financing,mortgage,bailout,DAP,down-payment assistance,home buying,fixed rate mortgage,housing bill,real estate,foreclosure,pre-foreclosure

Comments

[Kane]

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[workingmom08]

It's not too late to add your voice to the growing outcry against ending downpayment assistance programs in America. The clock is ticking, but it hasn't run out! Go to www.DPAGroundswell.org and add your comments!

[workingmom08]

Great news! H.R. 6694, the bill that will save downpayment assistance, has been passed by the House Financial Services Committee, positioning the bill for a floor vote in the coming days. Visit www.DPAGroundswell.org for more details.

[Laura Woods]

Thanks much for sharing this information with your readers, Dewita. This is a critical issue for homeowners, which as you touched on, is clearly noted by the amount of press it's getting. I invite you to visit http://www.nhcopenhouse.org - the blog for the National Housing Conference - to see what experts have to say about this issue.

Thanks, Laura

[workingmom08]

I have an update on the DPA situation. Check out this article that talks about a possible compromise between HUD and DPA: http://www.inman.com/news/2008/09/9/congress-weighs-reprieve-seller-funded-gifts. If you haven't taken the time to visit www.dpagroundswell.org, please do so! There is nothing like the voice of Americans raised together in one purpose to get things done! I want DPA programs to be around when I sell my home!

[workingmom08]

Hi...I just thought you should know that there is a new website dedicated to saving downpayment assistance.  The address is www.DPAGroundswell.org.  This site contains an area where you can email comments or letters to your elected officials letting them know you want to help save DPA. Also, there was a bill introduced by Reps Maxine Waters, Gary Miller, Al Green and Christopher Shays on July 31, 2008, that would reinstate SF-DPA. If passed and signed into law, the FHA Seller-Financed Downpayment Reform and Risk-Based Pricing Authorization Act of 2008 (H.R. 6694) will allow downpayment assistance to continue indefinitely. Let your elected officials know that you support this bill.