Personal Finance 

The Maes & Macs: Freddie Mac, Fannie Mae, Ginnie Mae, and Sallie Mae

Freddie Mac Fannie Mae Valcano CartoonWith the recent news of Freddie Mac and Fannie Mae being delisted from the NYSE and relegated to the OTC market, I thought it would be interesting to take a look at the four entities that share similar names. Freddie Mac, Fannie Mae, Ginnie Mae, and Sallie Mae sound very similar and while each started as a government sponsored entity (GSE), they’ve taken very different and distinct paths since their creations.

They’re often mistaken for each other and before I researched this, I didn’t know the difference between Freddie Mac and Fannie Mae (does it matter? they both seem f’d). I also didn’t know what Ginnie Mae did, other than being the only one that was explicitly backed by the US government (until recently, Freddie and Fannie were implicitly backed by the USG), and only that Sallie Mae dealt with student loans.

Let’s see what these guys do!
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WIN: Freddie Mac, Fannie Mae Bailed Out

300 Billion Cost of Freddie Mac Fannie Mae BailoutThe estimated cost of the bailout of Freddie Mac and Fannie Mae is $300 billion, that’s if their loan books only suffer 5% loss. For some, that 5% guess is a little low, for others it’s on target.

Freddie Mac & Fannie Mae 52-Week Stock Price RangeWhen Freddie Mac (FRE) and Fannie Mae (FNM) were taken into conservatorship, their common stock was essentially rendered valueless. The numbers you see are their 52-week stock price ranges as of Wednesday (9/10/08) and it’s a pretty grisly sight isn’t it? Why are people buying the stock? You never know what can happen. Bear Stearns was sold for $2 a share yet people kept buying it, a week later the price was revised to $10 a share. You never know!

$24M Freddie Mac & Fannie Mae CEO Executive CompensationWant to get fired up about something? How much do you think you can get to run Freddie Mac into the ground? What about Fannie Mae? Exiting CEO Syron of Freddie Mac may get between $12m and $14m. Exiting CEO Mudd of Fannie Mae could get anywhere from $7m to $9m. [Newsday] It’s hard work getting the “sponsored” out of “government sponsored entities.” (apparently it was harder at Freddie Mac!)

$12 trillion housing marketAnd, to put all these numbers in this perspective, the mortgage market is about $12 trillion a year.


Freddie Mac, Fannie Mae Failure Imminent

It’s no longer imminent, Freddie Mac and Fannie Mae have been assumed by the Federal Housing Finance Agency.

It seems extremely likely that the government will be taking over Freddie Mac and Fannie Mae.

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Housing Stimulus Bill Explained

Foreclosure! Housing Stimulus BillThis week, the Senate passed a housing bill a little over a week ago (the House joined last Wednesday) that seeks to give the housing market a shot in the arm. With 1 in every 171 homes going into foreclosure, the cries for help are getting loud and loud and, with the next year’s deficit nearing half a trillion dollars, we might as well pile it on. What’s another few hundred billion? Personally, I don’t like the idea but economic turmoil doesn’t help anyone. It doesn’t help the people who erroneously got themselves into bad loans, it doesn’t help the people who intelligently avoided them, and it doesn’t help everyone else standing on the sidelines. Considering we can’t pass energy legislation and likely won’t before Congress recesses in a week, we might as well take what we can get.

So, what’s going on? Here are the bits that are likely to affect you.

The Main Bailout

The FHA will be allowed to insure up to $300 billion in 30-year fixed mortgages for those at risk and who are living in owner occupied homes. The net result of this is that some loans will be restructured from their current state to an FHA insured loan. It’s help but it’s not a get out of jail free card, you’ll see why in the second paragraph of the gotchas section.

Who is qualified? You qualify if you have a loan that was issued between January 2005 and June 2007, must be spending at least 31% of your gross monthly income on mortgage debt, the total debt cannot exceed 95% of the home’s appraised value, and prove that they will not be able to continue to pay their mortgage. They can be defaulting or current, that won’t matter, but they have to retire all other debt on the home.

What happens? If you think you qualify, go to an FHA-approved lender and they will take it from there.
Any gotchas, catches, or tricks?There are two types of gotchas. First, in order for this go through, the lender will have to write down the value of the existing loan to 90% of the home’s current value and take the hit. Lenders won’t do this unless they think they’ll lose more than that, so you will probably really have to be in trouble to qualify.

The second type of gotcha is the restrictions and extra payments the borrower will have to bear. You can’t get a home equity loan for at least five years, you’ll have to pay the 1.5% annual insurance premium to the FHA for the guarantee, you’ll have to pay a 3% exit fee on the principal to the FHA if you sell or refinance, and finally you’ll have to give up all profits to the FHA if you sell or refinance within a year. After a year, you’ll only be on the hook for 90% of the profits and drops by 10% each year until it gets to 50%, where it will be forever. That’s a long time.

The Supporting Cast Measures

There are a few other additions to the bill that may be of interest.

Conforming Loans ceiling set to $625,500. A temporary measure increasing the maximum value of a “conforming loan,” or loans that would be guaranteed by Fannie Mae or Freddie Mac, was increased and pegged to home prices in a geographic region. I mentioned it as the Little Footnote on the 2008 Tax Stimulus Package and it really was a boon for the higher end housing market. Well, it’s permanent now.

10% home-buyer “credit,” up to $7,500. It’s not really a credit, it’s a 15 year no-interest loan of up to 10% of a home’s purchase price, no greater than $7,500. I don’t know if this will induce many folks into buying, there’s no sense rushing to buy something if you think it’ll still go down in value. No one loses money by sitting on the sidelines in this market.

My Thoughts

Overall, I think the way the “bail out” was structured was reasonable. Borrowers might be bailed out, only if the lenders accept the writing on the walls, but they don’t get to reap any rewards on the back end. I like the idea that the government gets at least 50% of a bailed out home’s appreciated value if it’s sold or refinanced. That’s a hit and the cost of doing business. Qualified borrowers get to keep their homes, lenders don’t lose as much, both sides seem to win.

It appears that the only losers are those excluded from the deal (taxpayers included). Lenders may be stubborn and refuse to take the hit, borrowers may find themselves close but not quite over the 31% gross income rule, and others may be left out because of the date of issue on their loan.

You can’t save everyone.

(Photo: respres)


The Little Footnote on the 2008 Tax Stimulus Package

If you weren’t a fan of President Bush and believed he, and politicians in general, only pushed for tax breaks for the rich then you’ll want to pay close attention to a recently Fortune that sheds some light onto the little footnote on the 2008 tax stimulus package. Most people focus on the tax stimulus check they’ll be receiving in a month or two, I know I did because that’s what affects us and most Americans. Fortunately, we have people like Allan Sloan focusing on all parts, including the little piece about raising the “maximum size of a ‘conforming’ mortgage to $729,750 from the previous cap of $417,000.”

What the heck does that mean? A conforming loan is one that Fannie Mae and Freddie Mac can buy. Since they can buy them, the interest rates on the loans are generally lower because they’re less risky. If a bank knows it can sell it to Fannie Mae and Freddie Mac, they can charge less in interest. The spread these days, according to Fortune, is a significant 1.27%.

My friends that share a half-million dollar mortgage, and those who own homes that are worth more than $417,000 but less than $729,750, benefit the most from this. Borrowers have access to lower interest rates and thus are able to purchase “more house.” (Nothing changes for those above the $729,750 amount)

For example, for the monthly mortgage payment of $1,500 can get you a $250,188 loan at 6.00% or a $219,448 loan at 7.27% – that’s a difference in the purchase price of $30,740! And, it obviously gets bigger as your amounts get higher. This makes homes in that range more affordable and thus helps increase their value. That’s stimulus people!

Allan goes on to recognize that the boost will expire at the end of the year, since it was designed to help stimulate the economy, but he suspects it will remain. I just wanted to highlight this piece of the package since very few people discuss it and Allan does a great job. His ending quote is a gem as well – “The one thing I liked about the stimulus package was that the government had enough sense to not send money to people like me. But then it turns around and hands me a housing subsidy. I’ll gratefully accept the gift. But that’s no way to run a country.”


The 149th Carnival of Personal Finance is now available, I submitted my post on laddering CDs for your emergency fund.

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