Since the mortgage crisis of 2008, much has changed in home lending. At the center of this storm has been Fannie Mae and Freddie Mac. While it has been a difficult road, much has changed in the agencies in the past eight years and, in fact, it appears that they are both on a upswing.
Both Fannie Mae and Freddie Mac have announced that they expect to break lending records to multifamily housing units this year. The cap on multifamily housing lending was relaxed in 2015 and they are well on track to secure more than $50 billion of these types of loans. This loosened restriction has allowed both companies to finance many apartment complexes and other multi-family housing stimulating the economy.
Freddie Mac and Fannie Mae do not issue mortgages themselves. They are both shareholder owned companies that operate under a congressional charter. They purchase mortgages that have been issued by other lenders, package them with some securities, then sell them with guarantees to make investors whole if the loans default. They are both regulated by the Federal Housing Finance Agency (FHFA).
The great news is that they are making money again. In fact Fannie Mae and Freddie Mac have repaid more than the $258 billion given to them by the federal government to bail them out in 2008. Unfortunately, according to their regulator, the continued government control is depleting the cash reserves putting the companies at risk again.
Melvin L. Watt, director of the Federal Housing Finance Agency, said, “Some of the challenges and risks we are managing are escalating and will continue to do so the longer the enterprises remain in conservatorship.” Despite current lawsuit filed by several agencies claiming the government is overstepping it is likely that both Freddie Mac and Fannie Mae will continue to churn out profits to the Federal Treasury for many more years.
Recently both companies agreed to new terms to resolve mortgage disputes with their lenders. Lenders create the loans and then sell them to Freddie Mac and Fannie Mae. These loans must meet certain criteria or the lenders risk being fined for their error or, worse, are required to buy back the loan.
This change comes after four years of Freddie Mac and Fannie Mae pushing to change the consequences to encourage higher risk lending to less than qualified potential homeowners. In 2013 lenders were told they would not face having to buy back loans as long as they were current on their payments for three years, except if there was fraud. In 2014 they negotiated with lenders on what exactly constituted fraud. Last year they more clearly defined the costs to the mistakes as well as the potential for lenders to have less severe consequences for small infractions.
Under this new agreement, Fannie Mae and Freddie Mac will go with their lenders to an independent arbitrator fit they cannot come to an agreement about the mistake. The lenders now have a say in the outcome where are before, unless the lender sued, Freddie and Fannie were the final deciders.
This is great news for minorities who tend to have less savings and lower credit scores. Since 2001 loans issued to African American borrowers declined 50% which was significantly higher than the 36% decrease overall.
Freddie Mac and Fannie Mae will now consider loans with credit scores as low as 620. While it will still be difficult to get a loan if you are a risky borrower these changed limits will help lenders feel more comfortable issuing loans they otherwise might have avoided. Director Watt said in a statement published by the FHFA that this change “will increase clarity for lenders and will ultimately increase access to mortgages for creditworthy borrowers.”
Either way that you look at it, both Freddie Mac and Fannie Mae are important players in the home lending space and they will continue to be for a significant time to come. Keeping cognizant of what changes are happening with them continues to give us insight into what is happening in the larger lending market. Stay up to date and continue to read up on the latest news in The Power Is Now Magazine as well as my blog. The power is now!
Eric Lawrence Frazier, MBA
President and CEO