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The future of Fannie Mae and Freddie Mac

Most people think that the bank they make their mortgage payment to actually owns the mortgage, but in most cases, the bank that you make your payment to just services the mortgage and it is ultimately owned by one of the two mortgage giants.

Fannie Mae and Freddie Mac where chartered back in the early ’70s, and later became public companies that were traded on the stock exchange. The purpose of Fannie Mae and Freddie Mac was to raise funds from investors to purchase mortgages from banks.

Fannie and Freddie will sell bonds called “Mortgage Backed Securities,” or MBS, that guarantee an investor a certain rate of return. Fannie and Freddie will take that money and buy mortgages from banks such as Wells Fargo, Bank of America or Chase so that their money can be freed up to do more mortgages.

The rate they sell the mortgage at is slightly higher than the rate given to investors, which is where their gross profit comes from. Most people think that banks have an unlimited supply of money to issue mortgages, but it is Fannie and Freddie that raise the money to buy these mortgages.

Mortgage debt in the United States is more than $10 trillion. Fannie and Freddie own or insure more than half of that amount.

In September of 2008, Fannie and Freddie were taken over by the federal government because of the huge losses they were sustaining because homeowners were unable to make their payments. Had the government not stepped in and taken them over, there would have been very little money available for mortgages (because it would have been limited to what banks could offer only, and the real estate market and the economy in general could have taken an even bigger hit than we have already experienced.)

As of the end of last year, the amount of money that taxpayers put into Fannie and Freddie to keep them afloat was $169 billion. But we are seeing some light at the end of the tunnel.

Last quarter, Fannie Mae reported a $3 billion profit and Freddie Mac reported a $2.72 billion profit. It is far from the $169 billion total, but things are moving in the right direction. There may be a public offering in the future that could potentially pay back the taxpayers in full, just like with auto makers.

Keep your fingers crossed.

For more information, call 773-557-1000, e-mail ron@ronmortgage.com or visit www.ronmortgage.com.

About Ron Ricchio

Renato (Ron) Ricchio is president of Chicagoland Home Mortgage. He grew up in Westchester and attended St. Joseph High School and DePaul University, taking a job as a loan officer in the mortgage industry soon after graduating with a bachelor's in finance in 1991. He started his own company in 2001, which he operates today. He has been ranked in the top 150 loan originators in 2010 and 2011 by Origination News. Ron is happily married with three beautiful children. A board member of San Francesco Di Paola Society and the founder of Ricchio Family Toy Drive for Lurie's Children's Hospital, he enjoys cooking and spending time with family and friends.

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