High foreclosure rates across the country
as well as a faltering financial sector has dictated government involvement in
the mortgage industry. This involvement
has facilitated growth in both residential and commercial real estate and has
created more favourable and secure lending situations for financial
institutions. All this has been done in
order to stimulate economic growth in the United States.
The
growth of the federal government's involvement since the onset of the mortgage
crisis has created a situation in which
the government has become a substantial pillar to the survival of the mortgage
industry. Government has taken on much
of the risk formerly assumed by lenders and has essentially become the mortgage
market. With the power to set the terms
that allow mortgages to be approved and their ability to own a proprietary
share of many companies this government involvement now has the taxpayer
shouldering a substantial part of the risk associated with lending in an
uncertain economy.
The Federal National Mortgage Association
and the Federal Home Mortgage Corporation have operated as government sponsored
enterprises. These institutions are
better known publicly as Fannie Mae and Freddie Mac. Although both institutions report to their
shareholders they are protected financially and supported by the federal
government. These safeguards include a
line of credit through the U.S. Treasury, an exemption from state and local
income taxes as well as an exemption from the Securities Exchange Commission
(SEC) oversight. Their history has shaped the mortgage industry since the
1930's and continued support by the federal government is essential to
restabilising the economy and the housing markets across the U.S.
Fannie Mae was created in 1938 as President
Franklin Roosevelt's New Deal. The
creation of the Federal National Mortgage Association was to ensure that
mortgages were made more available to lower income families and to facilitate
liquidity in the mortgage market. In
1968 the federal government converted Fannie Mae to a shareholder owned
corporation in order to remove its transaction from the federal balance sheet.
In order to create a competing the federal government formed the Federal Home
Loan Mortgage Association in 1970. The
idea was that competition would create a more robust secondary mortgage
market.
The way Freddie Mac and Fannie Mae work is
that they buy loans from approved mortgage sellers. These loans are traded either for cash or
mortgage backed securities which guarantee payment of principal and interest. Mortgage sellers in turn can either sell or
keep the securities. These companies
also bundle mortgage backed securities from their own portfolios to investors
in the secondary mortgage market. In order for Fannie Mae and Freddie Mac to
guarantee their mortgage backed securities they set the lending terms and
guidelines that determine which loan applications can be accepted for
purchase. To simplify the role of
Freddie Mac and Fannie Mae is to say that they provide financial institutions
with the money to provide new loans.
The 2007 sub-prime mortgage crisis found a
lot of low income borrowers some with poor credit were unable to pay their
mortgages. Almost 80% of mortgages
issued to the sub-prime borrowers were adjustable rate mortgages (ARM). With home prices peaking in 2006 home prices
began to decline. Values continue to
decline as these high risk borrowers could no longer afford their homes due to
steep increases in the payments of ARM mortgages.
This
caused an explosion of foreclosures across the country. Again the situation was compounded by
problems with the Auto industry and the failure of economic icons such as Bearr
Stearns, The Goldman Sachs Group, Citigroup Inc. and even Freddie Mac and
Fannie Mae. Home prices accelerated
their descent as foreclosures increases, jobs were lost and the countries
financial situation teetered on the brink of disaster.
As a result lenders began to employ much
stricter standards for loans. A shell
shocked lending industry was not equipped to respond to financial failures of
this level and they essentially shut off the flow of money available for
loans. The federal government was forced
to step in to bolster confidence. The
Treasury Department and Federal Reserve were given the authority to grant access
to low-interest loans and removed the prohibition on the Federal Reserve to
purchase stock in Government Sponsored Enterprises. Despite these efforts the economy continued
on its downward trajectory.
Currently government involvement has
extended programs to reinvigorate the mortgage industry. There are no longer institutions offering
mortgage terms that do not require a down payment. But federal programs are in place that assist
with down payments for lower income families as low as 3% of the home's value.
Government backed mortgage insurance has made
this possible by insuring that lenders are protected in the event of default on
loans with limited equity in the home.
The federally backed Hope For Homeowners
program offers a glimmer of hope for struggling homeowners hoping to avoid
foreclosure. The program allows homeowners
to refinance their home at more favourable terms with a fixed rate mortgage
backed by the Federal Housing Administration (FHA). Lenders have to agree however to take a
substantial loss on their original loan but at least are guaranteed a partial
pay off and avoid costly foreclosure proceedings.
The federal government has also extend tax
credits to home buyers in order to stimulate growth. The Worker, Homeownership and Business Assistance Act of 2009 has extended
a valuable income tax credit. This
incentive has stimulated the housing industry and brought some hope back to
struggling home sellers languishing in struggling markets.
The
Home Affordable Refinance Program is designed provide more affordable loans to
existing mortgage holders in good standing.
By providing Freddie Mac and Fannie Mae guaranteed mortgages borrowers
can refinance at a more affordable monthly payment. It is hoped that this program will save 3 to
4 million families from avoidable foreclosure.
Federal
programs now operate as the only means to provide a stable loan
marketplace. Without federal involvement
corporate and personal finances would be crippled by the inability to obtain
affordable, secure and stable financing.
Programs such as Asset Guarantee
Program, the Home Affordable Modification Program and the Public-Private
Investment Program have bridged a period filled with financial uncertainty and
have allowed provided much needed support to an industry crippled by its own practices.
The
growth of the federal government's involvement since the onset of the mortgage
crisis has created a situation where the government no longer just supports the
mortgage market but rather has become a substantial pillar to the survival of
the mortgage industry. The government
has taken on much of the risk that was previously assumed by lenders and has
essentially become the mortgage market.
They have the power to set the terms that allow mortgages to be approved
and they own a proprietary share of many companies that are major players in
the mortgage industry. This government
involvement now has the taxpayer shouldering a substantial part of the risk
associated with lending in an uncertain economy.
Someday the federal
government will be able to limit its involvement in the mortgage industry. But for the time being their support is
necessary to reinvigorate the economy and stimulate growth in both residential
and commercial real estate sector.
