The Federal National Mortgage Association (FNM), nicknamed Fannie Mae, was a depression-era institution created to make homeownership affordable for the working-class. Freddie Mac (FRE) was created in 1970 to provide liquidity, stability and affordability to the housing market.
Today, Fannie and Freddie guarantee or own over half of U.S. mortgages valued at $5 trillion. But with the credit crunch, too many of those loans started going into default, hurting the companies’ financial reserves and driving up borrowing costs.
Now that the U.S. government has taken control, here’s what should happen:
What Will Happen
Mortgage rates will drop. The 30-year fixed is at 6.08% today, more than a quarter of a percentage point lower than Friday, according to Bankrate.com.
Update: Rates took a big dive downward on Monday, with the national rate for a 30-year fixed mortgage at 5.75%, according to Zillow Mortgage Marketplace. At a state level, the 30-year fixed rate mortgage rate in Arizona saw the most significant drop from 6.35% to 6.13%, while Michigan saw the smallest decline from 6.30% to 6.25%.
The takeover will shore up financing for buyers with stellar credit. (“Stellar” is defined as folks with credit scores above 700.)
It will hurt performance in mutual funds that invest in the stocks of Fannie and Freddie. It will also help funds that invest in their debt.
What May Happen
The takeover could have a domino effect: It could help stabilize housing prices, which have been falling, by allowing people with weaker credit to buy homes. (Home prices have fallen almost 16% nationally in the past year, according to the S&P/Case-Schiller index.)
It may stem the tide of foreclosures.
What Won’t Happen
The takeover will not cut rates on jumbo mortgages. A jumbo mortgage is defined as a loan of more than $417,000 in most parts of the U.S. But jumbos are much higher in expensive housing markets. For example, a jumbo loan is up to $729,750 in the Los Angeles area.
It will not reduce home equity loan or line of credit rates.
It will not immediately eliminate fees for borrowers with weaker credit histories. Fannie Mae recently announced higher borrowing costs for loans to borrowers with weak credit. Applicants with credit scores between 640 and 659 who are putting down 15% to 20% now pay an additional 2.25% charge. Mortgage experts are hoping these fees will be dropped as the dust settles.