The Fannie and Freddie Takeover – Long Term Implications for Home Loan Refinancing
In an unprecedented move the US Government recently took over the two mortgage giants Fannie Mae and Freddie Mac. Between them the two companies own or guarantee over half of the home loans in the United States. Both of them have suffered heavy losses due to the ‘credit crunch’ and the government’s move signalled the fact that allowing them to ‘go under’ would have been catastrophic for the US mortgage market.
It is interesting to speculate what the long term implications of this move will be, especially as it relates to home loan refinancing. I should perhaps just mention, before going on, that what follows is indeed mere speculation. I certainly do not have a crystal ball with which to read the future!
Since the start of the credit crunch both Fannie Mae and Freddie Mac have been steadily increasing the rates and fees that they charge mortgage lenders. They did this in an attempt to protect themselves from the impact of increasing losses from loans owned or guaranteed by them. This move by two of the biggest movers and shakers in the mortgage industry obviously ended up driving up costs across the board as mortgage lenders simply passed on higher costs to borrowers (both in terms of increased interest rates and higher upfront fees).
Interest rates are obviously determined by the wider market but it is hoped that the government will drastically reduce some of the extra fees and charges that Fannie and Freddie have charged mortgage lenders in recent times. The logic behind this is that the companies used fees and charges as a form of ‘Mortgage Protection Insurance’. The fact that they have been taken over mean that they are much better insulated against losses thus reducing the need for high charges.
It remains to be seen whether government-controlled Fannie and Freddie will indeed lower fees and charges but the initial signs look positive. A concerted effort is underway to get more funding to mortgage lenders and to help them to assist borrowers with restructuring. If this is followed up with lower charges it is quite likely that some of the cost savings will be passed on to customers, leading to lower up-front costs and a more positive refinancing environment. One can only hope that this will indeed be the case.