Fannie Mae & Freddie Mac: How Do Changes to Each Affect Your Mortgage?

Tim Sickinger   

Some easy-to-grasp details from mortgage expert, Tim Sickinger — what recent activity in both government entities Fannie Mae & Freddie Mac could mean to your home mortgage — today and in the future.

Transcript

John: I'm your host, John Fischer, and we're here with Tim Sickinger, Principal of Fairfield County, Connecticut-based Ladd Financial, one of the top mortgage brokerage firms in the area. And today we'll be talking about what impact the recent troubles at two government-sponsored mortgage entities — Fannie Mae and Freddie Mac — might have on your home-buying habits.

Welcome, Tim. Good to have you here.

Tim: Thank you very much, John. It's good to be here.

John: Tim, we'll go right into a couple questions: Fannie Mae and Freddie Mac have been all over the news this past week; their stocks plunging and concerns rising about their short and long-term health. How has this affected the mortgage industry?

Tim: Well, that's a pretty tough question, John. I mean it's not easily answered in just a few sentences. But let me see if I can put this in layman's terms so some of our listeners can kind of understand what's going on. If we assume that Fannie Mae and Freddie Mac are two grown children and Uncle Sam — or the U.S. government — is the father who supports them. Let me see if I can use this analogy: My two grown children — I've already put through college — both of them have very good jobs, although one just lost his job. And the other, maybe, spent a little too much money in trying to buy his first home, and is having some problems making payments. Now, the kids are in pretty good shape at this point, and I'm in pretty good shape, too. I've got two other kids I've gotta put through college, but I've saved for that college education, and I've saved for my retirement. But my sons are beginning to have some financial issues. As a dedicated father, I'm going to do everything I can to support them. However, when I begin to support them (if they need support), and that's not necessarily going to happen yet, it's gonna mean I'm gonna have to use some of my other savings that I had put aside for my kid's college education, or I'm going to have to start borrowing more money, myself, in order to get them through their financial difficulty. Now as I begin to borrow more money, if I have to borrow more money, typically my credit score is gonna very likely decline because now I'm gonna have more debt outstanding. So although I'll still be able to borrow money, it's gonna cost me more money. So the problem sort of gets worse and worse as time goes on. Now again, my kids, even if I have to support them, I do have other assets where I can liquidate — like my retirement fund. But it's gonna be financially painful for me to do that, and I'd certainly like to avoid it at all costs. So I think that's kind of an interesting analogy and one way to maybe look at what's going on with these two government agencies.

John: So we're looking at a — again in layman's terms, Tim — potential double whammy here: Not only can this cause me problems with my current mortgage, but if I'm — down the road — shopping for a home based on the scenario you described, I could be in equally bad trouble?

Tim: Yeah, I was using that analogy more to describe the U.S. government and Fannie and Freddie as companies. The consumer today — if you have a mortgage that's currently held by Fannie and Freddie, and you can actually call your lender, a lot of times you won't know that. Your bank will know if it's sold its loans to Fannie Mae or Freddie Mac. If you have a current mortgage with them, this is really a non-event. It won't affect your payments at all; you're still expected to make timely payments. If, for example, your institution goes under, which I've seen in the past, you still are going to be expected to make payments — even if they do not bill you. You'd want to put your money in an escrow account in that case, but that's very likely not going to happen this time. But it's really a non-event — you are still expected to make payments, your terms cannot change. If you continue to make those payments, your mortgage will pay off normally. If you are looking for a mortgage right now — interestingly enough — you know the news has been very negative, but yesterday Fannie and Freddie Mac did go to the marketplace and borrowed — I think it was approximately $3 billion dollars on some bonds that it issued. And they were able to issue those bonds at a very low interest rate because there was still quite a bit of demand for them. Fannie Mae and Freddie Mac, those bonds are implicitly guaranteed by the government so they're considered very, very safe; and in fact the auction came off without a hitch. And interest rates inched down a little bit yesterday, and mortgage rates actually followed a little bit. At this point, certainly the credit crisis has caused everyone to be quite a bit tighter in terms of the mortgage lending standards, but I don't see the actual Fannie Mae and Freddie Mac issue really coming to roost with the consumer in the next two to three months.

John: In terms of a ballpark number, Tim, if in fact both Fannie Mae and Freddie Mac do own some $5 trillion worth of both owned and guaranteed mortgages — if that, in fact, is accurate — can you give listeners an idea of what percentage of existing U.S. mortgages that might be.

Tim: I believe it's approximately fifty percent — maybe marginally less than fifty percent — but one of the reasons this whole problem has really come to roost in the news these days is that analysts finally realized that the government has Treasury debt which is actually less — the total amount of government Treasury debt is actually less than the total amount of mortgages held. So what that means is that if the government does have to come back and start helping out Fannie Mae and Freddie Mac — through different funding means — one of the ways they would do that is through selling more Treasuries. And if they have to issue more and more Treasuries, chances are that could raise interest rates up. And that's not something we want to see in this kind of a marketplace right now.

John: Given the mortgage crisis of the last year, does this surprise you — this move — this government intervention. Or is this something that people in your business were probably expecting?

Tim: It has always been implicitly part of the Fannie Mae and Freddie Mac — sort of underlying knowledge — that the government would support them. I must say, I would expect them to support them at all costs. And they're gonna come up with some other ways aside from issuing Treasuries which will help to make money more liquid for Fannie Mae and Freddie Mac. It is imperative that that particular mortgage funding sources — both of those two companies — do not continue to play a vital role in our ability to fund mortgages in the United States. And I believe that the government will in no way will let them fail.

John: All right, Tim. Well I think we're gonna go for a quick wrap-up here. We'd like to thank Tim Sickinger, Principal of Fairfield County, Connecticut-based Ladd Financial. Tim, thanks for spending a few minutes with us.

Tim: Oh, you're very welcome, John.

John: And we'll look forward to your next visit.

Tim: Sounds great.

John: Take care, Tim.

Tim: Bye-bye.