Fannie Mae and Freddie Mac: Everything You Need To Know

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Fannie Mae and Freddie Mac: Everything You Need To Know -Casey Horn -Mak Karigan -Brian Lee -Mark Letteney

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Fannie Mae and Freddie Mac: Everything You Need To Know . -Casey Horn - Mak Karigan -Brian Lee -Mark Letteney. What are Fannie Mae and Freddie Mac?. Casey Horn. Fannie Mae. Created in 1938, Fannie Mae is a nickname for the official name of the Federal National Mortgage Association. - PowerPoint PPT Presentation

Transcript of Fannie Mae and Freddie Mac: Everything You Need To Know

Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac: Everything You Need To Know -Casey Horn-Mak Karigan-Brian Lee-Mark LetteneyWhat are Fannie Mae and Freddie Mac?Casey HornFannie MaeCreated in 1938, Fannie Mae is a nickname for the official name of the Federal National Mortgage Association.The purpose of Fannie Mae is to make loans and loan guarantees. Fannie Mae works to offer as many loans to low or middle income families.Fannie Mae works in the secondary market.Fannie Mae buys mortgages from banks, which frees up the banks capital, allowing the bank to offer more people loans and mortgages.Fannie Mae is a Government Sponsored Enterprise but is publically traded. This is because to Fannie Mae outgrew the need for federal funding, so it switched to a private enterprise.

Freddie MacCreated in 1970, Freddie Mac is the nickname for the Federal Home Mortgage Loan Corporation.Freddie Mac has the same functions as Fannie Mae. The reason Freddie Mac was created was to end Fannie Maes monopoly on the secondary mortgage market.Freddie Mac is also a Government Sponsored Enterprise that is publically traded.OthersGinnie Mae Works with federally funded loans. Government owned and not publicly traded.Sallie Mae Works with student loans and is publicly traded.Farmer Mac Works with agricultural loans and is publicly traded. How it Happened-Mak Karigan

How could this happen?Fannie Mae and Freddie Mac are a part of the subprime mortgage crisis. The two Government Sponsored Enterprises (or GSEs), as stated earlier bought mortgages from private banks. These private banks knew that they would have no problem immediately selling mortgage loans they had made to homebuyers. This security is what enables the banks to offer loans to low and middle class families.How can Fannie Mae and Freddie Mac afford to buy these mortgages?To make money, the GSEs would sell some of their mortgages as bonds in the form of Mortgage Backed Securities and charge a fee on the MBS it sold. Investors are okay with this fee, because the GSE is taking the risk. An MBS is just a group of individual mortgages that the GSEs sell to investors. If any original borrower, whose mortgage is in one of Fannie Mae or Freddie Macs MBSs doesnt pay their mortgage, Fannie Mae or Freddie Mac would step in and pay the difference to the investor. The same goes for if a borrower has their house foreclosed upon- Fannie Mae or Freddie Mac will pay the difference of the home sale and the mortgage to the investor.Separate from MBSs, Fannie Mae and Freddy Mac also keep some of the mortgages they buy from the banks, as another source of revenue.The loans from the banksFannie Mae and Freddie Mac can only buy what are known as conforming loans which have a limit of $417,000 for a 1 family home, as of 2008.The more loans banks are able to sell to Fannie Mae and Freddie Mac, the more money banks are able to make.

What could go wrong?As is the case for many financial meltdowns, greed and stupidity are to blame.Banks began making junk loans, where the bank didnt thoroughly check the borrowers financial status. This allowed the bank to make more profit by selling an increased number of mortgages to the GSEs. Not all the blame can be placed on the banks. Also at fault are individuals who believed they could afford loans well out of their asset range.

How does this affect Fannie Mae and Freddie Mac?The GSEs have been hurt in two waysAs the mortgage payments caught up to borrowers, more and more people have had their homes defaulted on. This caused the GSEs to have to cover the difference for the investors who invested in an MBS.GSEs have had to cover the cost of defaults on mortgages they kept for themselves.So many mortgages were dragging down Fannie Mae and Freddie Mac that the two lost a ton of money and needed financial help from somewhere.

What the government is doing about it-Brian LeeThe U.S. governments takeover of Freddie Mac and Fannie MaeTogether Fannie Mae and Freddie Mac own or guarantee just under half the total value of home loans in the US.$5,500 billion worth of residential mortgages, just under half the value of Americas $12,000 billion worth of outstanding home loans.The U.S. governments takeover of Freddie Mac and Fannie MaeFreddie Mac and Fannie Mae neared bankruptcy because of subprime mortgage,Subprime mortgage- the practice of lending money to people with low credibility at a high interest rateBasically, investment banks were taking a huge risk because eventually people could not pay their mortgages anymore The U.S. governments takeover of Freddie Mac and Fannie MaeSince Freddie Mac and Fannie Mae owned just under half of the U.S. mortgage market, if they were to go bankrupt the economy would have not been pretty. So the government (Federal Housing Finance Agency (FHFA)) takes over by putting them into conservatorship, which pretty much means that the government has authority over the two mortgage corporations. The CEO and board of directors from each company were fired and replaced with a whole new group. Herbert Allison, who is the former chair of TIAA-CREF, is the new CEO for Fannie Mae. David Moffet, who is the former vice chairmen and CFO of US Bancorp., is the new CEO for Freddie Mac. The take over, however, will eventually get paid with our taxes."The rescue will provide up to $200 billion in new capital"Okay, but what does the bailout of Fannie and Freddy mean to me?-Mark LetteneyThe GoodMortgage RatesToday: 5.87%Day of Bailout: 6.35%

Refinancing: The Snowball EffectHomeowners can take advantage of the new lower rates As people refinance, market stability will return and investor confidence will snowballSupply and demand will return to a scared marketThe BadLow Credit Score WoesBuyers with low credit scores will incur high charges on new mortgages, up to 2.25%Jumbo MortgagesMortgages valued at over $417,000 will be essentially unaffected by not experience a rate decrease.Large mortgage capital could be helpful to return liquidity to the market, but there is no incentive.The UglyMutual FundsThousands of mutual funds invest in the financial marketBuilt in portfolio diversity fails