Back in 2008, the government-sponsored company known as Fannie Mae was taken over by the government because it was suffering so many losses as a result of being too easy on loan requirements and approval.
Fannie Mae issues mortgage bonds to investors at a certain rate of return and then uses the money that it receives from the bond issuance to buy mortgages from companies at higher rates of return and keeps the difference as profits.
Fannie Mae and it smaller sister company, Freddie Mac, own more than half of the $10 trillion residential mortgage market.
Fannie Mae and Freddie Mac tightened the guidelines and restrictions after the financial crisis in 2008 to the point that it was restricting good borrowers from obtaining.
The loan losses that Fannie Mae and Freddie Mac incurred were over $150 billion. The U.S. Treasury at the time used taxpayer’s money to keep these companies, and the real estate market afloat.
Had Fannie and Freddie shut down it would have created a tailspin in our economy of epic proportion. Not having a source for real estate financing would have been catastrophic.
Fannie and Freddie have since paid back all of the money that the Treasury lent them and are now paying the government dividends from the profits that they make. The guidelines have become so conservative that the loan losses are down substantially. This is a great accomplishment.
With Fannie and Freddie now performing well, they are looking to lower some of their “under” standards to not only quiet the critics but to also possibly increase their profit margins.
I was a critic when the bar was set higher back in 2008, but we have now all adapted and I do not feel that this should be changed.
We are just beginning to recover, and I do not feel that we should be taking on a level of risk that would put us back into a position where, if the economy where to slip and fall, that homeowners who received these higher-risk mortgages will be the first to fall and we could find ourselves stumbling backward in time. Déjà vu.
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