Minnesota Real Estate Investors Association, Inc.

Fannie Mae and Freddie Mac: Cornerstones of the U.S. Housing Finance System

Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are pivotal entities in the American housing finance system. Created by Congress, these government-sponsored enterprises (GSEs) ensure liquidity, stability, and affordability in the mortgage market. Let’s delve into their roles, functions, and impact on housing finance.

Key Functions of Fannie Mae and Freddie Mac

1. Providing Liquidity to Mortgage Markets

Fannie Mae and Freddie Mac purchase mortgages from banks, savings institutions, and mortgage companies. By doing so, they provide these lenders with cash, which can then be used to issue new loans. This cycle ensures that lenders have the resources to meet the ongoing demand for home loans.

2. Packaging Mortgages into Mortgage-Backed Securities (MBS)

The GSEs package the purchased mortgages into mortgage-backed securities (MBS), which are sold to investors. By guaranteeing the principal payment and interest on these securities, Fannie Mae and Freddie Mac attract investors who might not traditionally invest in mortgages. This process:

• Expands the pool of funds available for housing.
• Makes the secondary mortgage market more liquid.
• Lowers interest rates for borrowers.

3. Stabilizing the Ho
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I wrote about the Anti-Flipping Rule Waiver just over a year ago and at that time I predicted that it would get extended: Flipping-is-Legal-Again.

Three days before the expiration of the original waiver, they extended the Anti-Flipping Rule Waiver till the end of this year, December 31, 2011. This is good news for everyone because the real estate market needs investors right now to help clean up the foreclosure mess.

Wholesalers can do what they do best, find and negotiate good deals on rundown REO properties. Rehabbers can do what they do best, quickly rehab the properties and bring them back up to code. And first time home buyers can get into a home at a good price that is completely rehabbed and ready to move in without having to worry about painting, fixing a leaky faucet, replacing the carpet or any other cosmetic improvements that they can not afford to do or don’t have the time for right now.

Look at the drop starting on May 1st. This graph should be all you need to realize that the first time home buyers tax credit drove a lot of sales at the moment, but they would be sales that were pulled forward. In other words, if the tax credit wasn’t there, the sales would probably still have happened, but they would have been spread out over time rather than pushed back into April.

First of all, the banks are short staffed, so they can’t file NOD (Notice of Defaults) and complete the foreclosure process as fast as new borrowers are falling into default. The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics. That is the first part to Shadow Inventory.

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This has also created other problems. I had a closing that kept getting pushed back because fha hadn’t review the file to release the funds because they were so backed up. We finally closed last week and from talking to the buyers at the closing, they just wanted to close before they lost the credit, but it wouldn’t have stopped them from buying, they just bought now rather then this summer when they originally planned on moving.

Ok, ok, I know, flipping has never been illegal, but with recent changes in the mortgage industry, the lenders are coming back around and asking for our help again. Wells Fargo was actually the first major lender to change its stance on seasoning, but because fha is a government program, this is huge. First, let me give you a little back ground so you understand what the hoopla is all about over fha temporarily suspending its 90 day title seasoning rule.

Several years ago, when all was right with the world, some investors were taking advantage of a unique situation in the mortgage industry. The federal government wanted everyone to be able to take advantage of the America dream. So they lowered interest rates and loosened up the required mortgage qualification guidelines for Fannie Mae and Freddie Mac backed mortgages, including down payments. This actually made it cheaper and easier for people who normally would never have been able to qualify for a mortgage, get one with little or no money down.

These changes actually made it cheaper for a tenant to get a mortgage than it was to rent a property, because they could finance the entire purchase price, including their closing costs. If they were to rent a property, they would at least need the first month’s rent and a security deposit. But if they bought a house, they didn’t need any of their own money up front and their first payment wasn’t due until after they had lived in the property for one month. Plus, with a mortgage, the lender only pulled their credit report, and since most of these tenants never established credit, they didn’t have bad credit. Note that a credit report doesn’t show eviction notices or criminal history, which is where many of these tenants had records.
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May 1, 2003 HUD imposed a 90 Day Title Seasoning requirement for all new fha loans. This was their big idea to help protect the consumers from the Big Bad Flippers. It only took 6 years and a housing market crash to show the elitists the errors of their ways. Now they need our help to fix their mess.

They finally came to their senses and temporarily suspended title 24 CFR §203.37a(b)(2), which is the 90 Day Title Seasoning Requirement. This is only a temporary suspension. Starting February 1, 2010 and expiring on 1/31/2011, First time Home Buyers who apply for an fha loan will not have the 90 Day Title Seasoning Requirement. However, we as investors will still need to follow a few guidelines in order to Resell (Flip) our Short Sales / REO’s and Flips to First Time Home Buyers who are applying for an fha loan.
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Why not? Every other financial institution has received one, isn’t it about time the feds bailed out themselves. After all, it’s not their money, its ours.

Here is a report I found on Mortgage News Daily
http://www.mortgagenewsdaily.com/channels/video/112280.aspx

The only reason I think that fha.com" target="_blank">fha is even talking about a bailout, is because their counterparts Fannie Mae and Freddie Mac got a bailout. Now granted, there are a lot of fha.com" target="_b
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Real estate is changing at an ever increasing pace.  A few years ago, you were hard pressed to find an abundant supply of Bank REO’s on the market.  Short sales were the rave and houses were still selling so most potential foreclosures were either going through a short sale or were sold before the banks got possession through foreclosure.

Then last year the banks all but stopped accepting short sales and the number of new foreclosure filings started to increase at record paces.  This caused a flood of foreclosures reaching the banks REO department and our focus shifted to finding good, no great deals by searching the MLS for bank REO’s.  We were able to acquire great deals on foreclosures and rehab them for resale.

Then last fall there were so many foreclosures that we were no longer able to resell the properties retail so the new focus became acquiring these bank REO’s for rentals.  This was a good strategy for many because we could buy the properties cheap and rents remained high.  This gave investors good cash flow.  And that is something we haven’t seen in many years.

Recently though we have been experiencing something quite different.  With all the foreclosures on the market, everyone wants in on the good deals.  That includes first time home buyers who have a huge advantage over investors.  Their 1st advantage is that they can get an fha.com" target="_blank">fha loan which only requires a 3% down payment compared to the 30% investors must put down. Their 2nd advantage is that they get an $8,000 tax credit just for buying.  Their 3rd advantage is that they qualify for the numerous first time home buyer rehab loans available through most cities and charitable organizations.
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This is my first ever blog post, but what better time to start one then right now.  We have had a very interesting year featuring a myriad of different twists and turns.  When we started out the year, we basically knew where we were headed and by the end of the year, no one knew which way to turn next.   Every day something new happens and I have had so many thoughts and concerns that I decided it was time to start writing and share them with you on a regular basis.  I want your comments and feed back as we take on the golden era of real estate investing.

I am actually very excited about the real estate market that we find ourselves in right now.  Many of us have been saying that this is one of the best times in our lifetimes to be an investor, and the closer we get to the end of the year, the more real that statement becomes.  The government keeps stepping in to bail out everyone except the ones who actually need the bail out.  While that may seem cynical, it has presented us with even more opportunities and the longer the government tries to figure out what to do, more confusion lingers in the market.  This only prolongs our window of oppo
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