Real Estate Blog

Few outside Washington and Wall Street may understand what Fannie Mae and Freddie Mac do, but the government’s bailout of the two will likely be felt in cities and suburbs across the country.

The takeover will be good news for those looking to buy a home or hoping to refinance their mortgages if it leads to lower interest rates, as experts expect.

But for homeowners already behind on their mortgage payments, or who owe more than their homes are now worth, the plan unveiled Sunday by Treasury Secretary Henry Paulson offers little in the way of extra relief.

“The bailout will give the mortgage industry a stability that we haven’t had in a couple of years,” said Rich Cosner, president of Prudential California Realty. “But frankly no, it won’t help (struggling borrowers) to refinance.”

Fannie Mae and Freddie Mac play a critical and increasingly dominant role in the mortgage market. The companies buy mortgage loans from banks and package those loans into securities that they either hold or sell to U.S. and foreign investors. That allows traditional lenders like Bank of America, Wells Fargo and Washington Mutual to make more loans.

Together, Fannie and Freddie own or guarantee about $5 trillion in home loans, about half the nation’s total. But an alarming number of those loans started going into default, draining the companies’ financial reserves and sending a chill through credit markets worldwide. As investors grew more skittish, borrowing costs started rising.

By placing Fannie and Freddie into a conservatorship, the government is promising investors that the companies’ debt is as safe as the Treasury Department’s.

While not a cure-all, the bailout is still a step in the right direction, industry observers say. It will at least “keep the lanes in the mortgage freeway open,” said Greg McBride, a senior financial analyst at Bankrate.com, possibly putting the market on the road to recovery.

If mortgage rates fall, that will attract more potential buyers into the market, which, in turn, will help to prop up home prices, he said.

He expects mortgage rates on a conventional, 30-year fixed-rate home loan to fall over the next few weeks as the dust settles on the bailout. Rates, which now average 6.35 percent, could fall as much as half a percentage point, he said. But continued investor wariness and a depreciating housing market will keep rates from dropping further.

“We’re not looking at sunshine and daffodils in the housing market anytime soon,” he said.

Government officials declined to speculate on how much mortgage rates would be affected, but said they hoped government control would allow the companies to focus on their mission of supporting the housing market.

The Federal Housing Finance Agency, the new agency created by Congress this summer to regulate Fannie and Freddie, is planning to work with the companies on existing loan modification efforts and report on their results in the coming months.

Most mortgage brokers expect Fannie and Freddie’s lending standards to remain unchanged under the conservatorship. Over the past several months, the companies have tightened requirements substantially, making it hard for borrowers with any blemish on their credit reports to qualify for a loan.

However, brokers hope the government will eliminate or reduce fees that the pair have been charging lenders to gird against increased credit risk and losses from mortgages they buy. Those rising fees are squeezing out some borrowers because lenders typically pass them along through higher mortgage rates or higher upfront costs.

“That was not providing affordable financing. If fees were eliminated, we would see more qualified borrowers being able to refinance or qualify for a mortgage,” said Marc Savitt, president of the National Association of Mortgage Brokers.

Getting more buyers into the market is key to a turnaround. And a stabilized housing market with some price gains would help homeowners struggling with their mortgage payments. But such a market is at least a year away, Cosner said.

“That will help them,” he said, “if they can hold out that long.”

Other legislation might have to fill in the holes. Lawmakers are expected to watch intently the coming months how the takeover works, but more housing legislation appears unlikely until next year. Still, lawmakers may seek to influence how Fannie and Freddie operate now that the companies are under government control.

After the takeover, “there is more flexibility on the part of the government to try and help the housing market,” said Sen. Charles Schumer, D-N.Y.

The federal government’s dramatic takeover of mortgage finance companies Fannie Mae and Freddie Mac raises many questions for the public at large as home prices continue to fall and the U.S. economy remains weak.

Here are answers to questions Associated Press readers submitted about the bailout, which was announced Sunday by Treasury Secretary Henry Paulson and James Lockhart, director of the Federal Housing Finance Agency.

Q. Is the government going to help out any of the responsible people who did not buy a home when they could not afford it?

A. No. Despite criticism that the government’s aid rewards people who made bad financial decisions, lawmakers and government officials want to prevent the housing market from falling further. They are working in several ways to assist troubled borrowers, but acknowledge that not everyone will be helped. Consumer advocates, meanwhile, say the assistance is essential because many borrowers were duped into loans they didn’t understand.

Q. Three top Fannie Mae executives – Stephen Swad, Robert Levin and Enrico Dallavecchia - recently left the company or retired. What are they receiving as compensation?

A: Exit packages for departing Fannie Mae and Freddie Mac executives is already a hot-button issue in Washington. Former Fannie CEO Daniel Mudd is due to receive up to $8.4 million in compensation, while Richard Syron, Freddie Mac’s former chief executive is due to receive up to $15.5 million. However, Syron is likely to forfeit a $8.8 million cash grant, a person familiar with his thinking said.

Levin, the company’s former chief business officer, was entitled to $1.6 million in cash upon termination, according to a regulatory filing. Stock awards to Levin and Swad – the former chief financial officer – are now worth little. Information on Dallavecchia’s exit package was not disclosed.

Q. Is the U.S. government supporting Fannie Mae and Freddie Mac’s mortgage securities?

A. The government is not explicitly backing mortgage securities issued by the companies, which consist of thousands of home loans packaged into investments. The Treasury Department plans to make an initial purchase of $5 billion of those securities later this month in an effort to make home loans more available to consumers and lower interest rates.

Q. How will the takeover of Fannie Mae affect the sale of my house?

A. Fannie and Freddie are continuing their normal operations and will buy even more loans through 2010. Current real estate transactions shouldn’t be affected. In fact, mortgage interest rates are falling, and that may get more buyers off the fence.

Q. How does the Freddie and Fannie bailout compare to the S&L crisis bailout in the early 1990s?

A. The exact cost will depend on how far U.S. home prices fall. But some economists believe it could be more costly than the savings and loan crisis, which took six years and $125 billion in taxpayer money to resolve. That’s nearly $200 billion in today’s dollars.

Q. Fannie and Freddie used to have fairly strict loan standards. Were the losses magnified by Freddie and Fannie lowering their underwriting standards and accepting subprime loans?

A. Fannie Mae and Freddie Mac might have avoided a government seizure had they stuck with traditional 30-year, fixed-rate mortgages and not backed so-called called “liar loans” – mortgages approved without proof of borrowers’ income or assets.

While Fannie and Freddie didn’t make subprime loans, they did buy securities tied to those mortgages. The companies say they felt pressure to compete against Wall Street giants that were backing extremely risky loans that are now falling into foreclosure in droves.

Q. My home loan payment is $2,908 before taxes. My wife and I have a gross monthly income of $7,700. I also receive a commission that varies from month to month. Do you know if we will qualify for the assistance?

A. The Fannie and Freddie takeover is designed to stabilize the companies and aid the broad mortgage market, rather than assist individual borrowers.

However, you may qualify for a refinance loan under the Federal Housing Administration’s “FHASecure” loan program, depending on your credit score and other factors. Visit http://www.fha.gov or call 1-800-CALL-FHA.

Q. If Fannie Mae and Freddie Mac actually lowered mortgage rates as happened after the $200 billion takeover, would it have been necessary?

A. Fannie Mae and Freddie Mac don’t set interest rates, and don’t lend directly to consumers. They buy mortgages from lenders like Bank of America and Wachovia, and package them into securities, which are sold to investors.

Fannie and Freddie, however, do charge fees for their services, and those can be passed onto borrowers in the form of higher interest rates.

The level of investor demand for debt sold by Fannie and Freddie pushes their borrowing costs higher or lower, which in turn affects mortgage interest rates.

Q. What will be the impact on Fannie and Freddie’s shareholders?

A. Common shareholders have already been nearly wiped out as shares of both companies have been trading below $1 this week. The company’s preferred shares, which pay a fixed dividend and have priority over common stock when it comes to dividends and bankruptcy liquidation, are also virtually worthless.

Q: I’m in trouble with my home loan, and my mortgage broker says I don’t make enough money to refinance. What should I do?

A: Call 1-888-995-HOPE, a 24-7 counseling service run by the Homeownership Preservation Foundation.

Copyright © 2008 The Associated Press, Alan Zibel (AP Business Writer). All rights reserved.