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Last week the federal government took unprecedented action to shore up the ailing mortgage credit market. The Treasury Department has made available a $200 billion line of credit to fund Fannie Mae and Freddie Mac mortgage bonds, and has made allowances for more advances in the future if needed. Why did this happen? And what does this mean for home owners, buyers, and sellers? Does this rectify the housing mess we've all been living through for the last year?

Fannie Mae and Freddie Mac are the nation's largest purchasers of home mortgage loans, buying loans after you have closed your transaction with your local mortgage broker or bank. Their main purpose is to turn these loans into pools or groups of mortgages and sell them to investors as mortgage-backed securities, which trade on Wall Street.  This sale of loans to investors returns money to Fannie and Freddie, to return to your local bank or broker, so they have enough recycled cash to use in buying new mortgages. The cyclical nature of these trades is known as mortgage credit liquidity. Over the past year, as mortgage delinquencies have risen, the investor appetite for mortgage-backed securities has waned. The result has been the credit crunch we have all felt in the form of tightening mortgage guidelines. As a result of not being able to sell loans, Fannie and Freddie have had to hold more loans themselves. They are allowed to do this per their charters, but having swollen portfolios of loans, many of which are in default, has caused a strain on their capitalization. 

In the days leading up to the bailout, both foreign investors and Pimco, the largest bond purchaser in the United States, were rumbling about not buying any more mortgage bonds. Had that happened, market panic would have caused a world-wide dumping of U.S. mortgage-backed securities. Such an action would have been catastrophic for both our stock and bond markets.  Fortunately, Treasury Secretary Henry Paulson had been working around the clock with the Federal Reserve and the newly created Federal Housing Finance Agency to create a plan to avoid this chaos. They put their plan into action on Sunday, Sept. 7.

How does this affect you? In short, these actions serve to shore up our nation's supply of mortgage money going forward. We still need our markets to work through all the existing and pending loan delinquencies and the glut of homes for sale due to foreclosure, and mortgage credit guidelines will likely tighten further before we are through. This unequivocally does not “fix” the housing crisis, but it was a critical step in creating a floor of stability from which to work for the future. The government has put our money on the line until the situation heals itself, similar to what happened in 1989-1990 with the savings and loan bailout. Expect at least another 18-24 months before our housing market feels anything like what used to be “normal”.

What's next? The underlying structure of Fannie Mae and Freddie Mac is of great interest to legislators, who will undoubtedly begin working on clearing up the ambiguities of their charters and capitalization requirements which helped create this mess. In the fullness of time, taxpayers will be repaid for the money we've spent to prop up these companies. Share holders have lost most of the value of their private stock, but will keep their shares and may see value in them again in the very long term. Home buyers will buy, and sellers will sell, and credit qualifying will continue to be challenging over the shorter term. In the final analysis, our housing market will eventually rebound to be a robust part of the overall economy once again.

Tammy Engel is the only loan originator in Kern County authorized to display the Lending Integrity Seal of Approval. She has been providing sound, strategic financing solutions statewide since 1990, and can be reached at (661)822-REAL for your home loan questions.