Vail Daily column: Future of mortgage giants is unclear
Program Rate APR
30-year fixed conforming 4.125 4.143
30-year fixed agency jumbo 4.25 4.268
15-year fixed conforming 3.25 3.156
15-year agency jumbo 3.375 3.407
5/1 ARM 3 3.1
7/1 ARM 3.125 3.14
Agency jumbo loans run $417,001 to $625,500, rates for purchase or rate/term refi, 740 FICO, 75 percent LTV, 30-day lock, 0 percent origination fee. Closing costs and rates may vary due to loan amount, property type, LTV and qualifications and are subject to change without notice prior to locking in. Other rates and programs available. To check the license status of your mortgage broker, visit www.dora.state.co.us/realestate.
Macro Financial Group
150 E Beaver Creek Blvd.
Avon, CO 81620
There are approximately $9.4 trillion in outstanding mortgage loans out there and about $4 trillion of those funds were generated by Fannie Mae and Freddie Mac selling securities that, in theory at least, are secured first by the promise of the borrowers to pay back the money, then by the property that was mortgaged and ultimately by the federal government.
The debate in Washington over the future of government involvement in guaranteeing home loans is intense. What is clear though is that the federal government needs to be involved in the home loan business to keep money flowing and markets orderly.
There is legislation afoot that would assure the government would underwrite catastrophic losses in the future, which is basically what happened the last several years when the feds seized Fannie and Freddie and infused them with $190 billion in capital.
What is unclear though is what will happen to the shareholders of Fannie and Freddie, and there is some wild speculation going on in the stock and bond markets.
After the collapse of Fannie and Freddie, the stock was considered worthless and traded for less than a dollar a share.
On May 29, the shares for both companies got into the $5 range.
There is a lot of guessing (and perhaps wishful thinking) that Fannie and Freddie will be allowed to pay off their government loans and return to operating as private enterprises.
This is similar to what happened to AIG. Once AIG was paying its loans private shareholders were given the company back. But insurance and home loan businesses are not the same.
There are many insurance companies that tended their knitting and avoided the exotic investments that AIG reportedly indulged in with the passion of a crack addict who just found the mother lode stash. The business model of the insurance industry never really relied on government guarantees before or in the future. This makes it much more logical for the government to cut the strings with AIG after it got it’s money back. The same may be said of General Motors.
Reportedly, much of the speculation in Fannie and Freddie stock was fueled by talk of legislation that would restore the companies.
To an extent, such speculation makes sense from a business point of view. Such a move would hasten the return of private capital to the marketplace.
Although this needs to be tempered to assure prudent decisions are made and we don’t return to the old days when home loans were handed out like free popcorn.
The housing sector needs a combination of private and governmental involvement.
However, the sheer amount of the government investment (about $190 billion) and the involvement of the Federal Reserve in purchasing mortgage backed securities (about $2 trillion) makes it impossible to compare this to a bailout of AIG or GM. However, let’s not forget that Fannie and Freddie have tangible assets (as in loans receivable) in the trillions, but the problem is they lack liquidity of those assets as they are mostly long term.
Washington cannot take all the assets and turn it into one big government bureau. It would be a surefire way to cause economic collapse if the government were to just pull out of the home loan business.
Personally, I wouldn’t bet on the shareholders of Fannie and Freddie getting their companies back anytime this decade. Although there may be long term value, nobody should count on it for grocery money anytime soon.
My guess is we will eventually see the government pull back on the day to day control of the companies, but they will have to be able to repay the bailout billions first and demonstrate they can raise funds places other than the Federal Reserve. We also will not enjoy these low rates forever.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers.