Foreclosure and Real Estate Blogs

There’s been a lot written about home loans and securities lately with the emphasis on increasing foreclosure rates and the losses incurred by the holders of sub-prime securities.  That begs the question “What the hell is Fannie Mae and Freddie Mac, and why do I care?”

U.S. residential lending was far different in the fifties, rather than what we’ve got today.  Local banks, savings and loans, thrifts were all sources of financing, and although the loan terms weren’t too bad, it did require a 20% down payment to purchase a home.  Housing, and residential construction were subject to boom and bust periods often influenced by the availability of credit.

Fannie Mae was restructured in 1968 as a federally chartered corporation, Freddie Mac was created in 1970 to “compete” with Fannie Mae.  Both corporations are private, but are government sponsored and have lending advantages that aren’t available to non-sponsored lenders.  The explanation for what these organizations do isn’t hugely simple, but it is understandable.  They create CMOs or Collateralized Mortgage Obligations which entails combining a group of mortgages into a “pool”, then separating the future payments into “strips” with different risks and maturity dates.  Those strips are then sold as securities.

Many mortgage loans originated in recent times won’t be owned by a “lender”, they are originated to Fannie Mae or Freddie Mac guidelines, then sold into the secondary market.  The entity servicing(collecting payments) the loan may, or may not have an interest in the loan.

The use of CMOs in the past certainly helped stabilize housing markets and increased overall homeownership rates.  Where things went bad, IMHO, was when the demand for high returns led to the creation of CMOs for pools based on artificial or non-existent original loan documentation.  It was musical chairs with ever increasingly easy credit, the big problem being there were an awful lot of players and not too many chairs.