Need

In my previous post, I wrote concerning greed. If one were to look at that post only, one may think that the government is greedy because many believe the 2008 market crash was caused by a combination of the government’s mis-handling of regulations, the insurance companies, and lending institutions racing to the bottom. Does this mean the Borrowers were innocent. Should the public hold so much responsibility for the mishandling of available funds? How you handle your funds is how prudent lenders will determine your creditworthiness to a certain extent. 

Was there a need for Freddy Mac and Fannie Mae?

Fannie Mae was created in 1938 because of the housing market collapse. It was part of FDR’s “New Deal”. It was created to encourage banks to lend for homes by providing local banks with federal money to finance home mortgages. At its inception, Fanny Mae operated much like savings and loans for banks, allowing them to offer borrowers low interest rates. Fannie Mae grew into becoming what was called the secondary mortgage market. This policy permitted Fanny Mae to borrow from foreign investors at low-interest rates, and the federal government backed these loans. Fannie Mae earned its profits by holding on to the difference between what the borrowers paid and what their lenders charged them. 

In 1968, Fannie Mae’s monopoly became challenged by the creation of Freddie Mac. To break up this GSE (Government Sponsored Enterprise), another GSE was created by the government. Today, it’s believed that they hold about 90% of the secondary mortgage market. These GSEs are necessary for more people to purchase their homes.

In 1982, the bailout of these GSEs was 187 billion, which was $116 billion for Fannie Mae and $71 billion for Freddie Mac. Before throwing These GSEs off a cliff, we must note that they have paid back the bailout money. Also, important to know is the fact that $700 billion dollars was used in (TARP) Troubled Asset Relief Program to bail out the US Banking system, although only $444 billion of that funding has been spent.

Still, the question remains: is there a need for the federal government to back banks? Does the government have the authority to take our money to support its programs? That is the conundrum. If the government didn’t, fewer people could get a mortgage. When it does guarantee these loans, the taxpayer carries the burden. The difficulty lies in finding and maintaining the proper balance.

There are pros and Cons in getting a GSE loan. 

Pros

• More people qualify to purchase homes
• Low down payment available (3% VRS 20%)
• Nontraditional income sources acceptance
• There are different loans available to meet individuals’ needs

Cons

• The extra cost of mortgage insurance (It should be noted that once the borrower has 20% equity in the mortgaged property, this insurance can be canceled.)
• Income limits (the one percenters does not qualify for these loans.)
• Some lending institutions do not offer these types of loans.
• Required to take classes on home-ownership (This class can be done online and free of charge.)

If you can purchase a home without using Fannie Mae or Freddie Mac, do so. For the rest of us, there are three options:

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Do not accept a loan until you have the 20% requirement to put down.

1. Resign yourself to be a renter for life and make due the best you can with the ever-increasing portion of your income going to support the landlords financial security.
2. Take the free classes offered, become an informed buyer, and enjoy the advantages of being a homeowner.

Note: Images on this blog site are from accessible sources. No image or group of photos are intended to represent the people I serve. I don’t care about race (that is a politically correct term that I do not like because we are all of the same race, the human race. I prefer the term ethnicity), color, religion, sex, gender, marital status, disability, genetic information, national origin, source of income, Veteran or military status, ancestry, citizenship, primary language or immigration status. I am a service provider for all people. We will all rise together when we band together and help one another. Joseph Erwin is a Real Estate Broker, DRE # O2131799, and a CA general contractor # B 696662. He’s a member of the CRMLS and The East Valley Association of Realtors located in the Inland Empire region of Southern California.