FNMA & FHLMC under Conservatorship!

The following email was received by Bill Starkey, Owner and CEO or WR Starkey Mortgage this morning:

The Federal Government has placed both FNMA and FHLMC under conservatorship as of this past weekend. While many will have an immediate reaction that appears to be negative, this is the best possible solution that we could have hoped for as it relates to the mortgage industry. To understand this process in detail, you must first understand how the mortgage industry operates on a day-to-day basis...........

Fannie and Freddie both purchase home loans from financial institutions and then repackage those loans as mortgage-backed securities that they either hold on their own books or sell to investors around the globe. This process provides financial institutions with more money to make more home loans, greatly expanding home ownership. In other words, WR Starkey Mortgage makes home loans and eventually many of these same mortgage loans are purchased by FNMA or FHLMC and then placed into mortgage backed securities which investors can invest in just as an investor would invest in stocks.

The issue that has come up over the past few months is that investors have been hesitant to invest in these securities due to the falling housing markets and failing mortgage loans. The other major concern with investors has been the financial liquidity of FNMA and FHLMC themselves. The companies, which together own or guarantee about $5 trillion in home loans, about half the nation's total, have lost $14 billion in the last year and are likely to pile up billions more in losses until the housing market begins to recover. So the US Government is simply protecting FNMA and FHLMC from failure and thus giving investors around the globe the confidence to once again invest in mortgage backed securities.

What most people do not realize is that the failure of the two agencies named above would have caused a global tragedy that would have affected investors throughout the world. This move has eliminated this threat and should lower rates over time as well as provide assistance in correcting the current housing slump. However, please note that the current housing slump will not be cured over night and we will continue to see mortgage firms close their doors as they cannot continue to make money when their loan production is falling. These changes are a positive for WR Starkey Mortgage in that we are still focused on growth while others lick their wounds. The difference is that we now have the US Government standing behind the two largest mortgage investors which will provide stability in the US Housing markets.

There is obviously much more detail that is involved in the above stated changes but this should at least give you some basic knowledge to help you understand what happened and the effect on our industry.