Weekly Rate & Market Update 8-19-16
Question of the week: What are Fannie Mae, Freddie Mac and Ginnie Mae?
Answer: Last week we answered why if you have a Fannie Mae loan you do not make your payment to Fannie Mae. So what is Fannie Mae, its brother Freddie and cousin Ginnie?
Before we get to what they are and do, let’s get to the names. Fannie Mae is the nickname for the Federal National Mortgage Association (FNMA). Freddie Mac is the name used for the Federal Home Loan Mortgage Corporation (FHLMC. Ginnie Mae is the Government National Mortgage Association (GNMA). It is easy to see how Fannie and Ginnie got their names looking at the initials, not sure who or how Freddie came out of FHLMC.
Fannie and Freddie are “government sponsored entities,” or GSEs. The definition of a GSE is a private corporation that is created by Congress. You can purchase stock in Fannie and Freddie and they operate like other private corporations. During the mortgage and housing market melt-downs last decade the U.S. Secretary of Treasury Henry Paulson put Fannie and Freddie into conservatorship, taking control of the GSEs. As part of the take-over, the Treasury supported the two companies with approximately $100 billion each in exchange for preferred stock. Since then both GSEs have repaid the Treasury significantly more than the funds put into the companies.
Why do Fannie and Freddie exist? Last week I wrote a bit about secondary markets and Fannie and Freddie acting at clearing houses or conduits between investors and borrowers. That is the reason both exist, to provide liquidity to the mortgage markets. By having a central entity to provide standard underwriting guidelines and purchase mortgages that meet those guidelines from borrowers mortgages become cheaper for borrowers to obtain, thus expanding the opportunity of homeownership. The central entity also allows for more money to be available for residential lenders since they do not have to hold onto the mortgages they fund but can sell them to Fannie Mae thereby having more funds to make future mortgages.
When you hear about “conventional” or “conforming” loans they are referring to Fannie and/or Freddie loans. These are loan underwritten to the guidelines established by Fannie or Freddie (while similar there are differences in their guidelines).
On the investor side, when an investor purchases Mortgage Backed Securities from Fannie or Freddie they know that the loans in their investment have been underwritten to specific guidelines.
Ginnie Mae is different from Fannie and Freddie in that it is not a Government Sponsored Entity, but is a government owned corporation. Ginnie acts in the same manner as Fannie and Freddie but instead of conventional loans from the private sector, Ginnie issues Mortgage Backed Securities of government insured mortgages, primarily FHA and VA mortgages. The purpose and result is the same as with Fannie and Freddie: provide more efficient movement of capital from investors to lenders to expand availability of funds for mortgages thereby reducing costs to borrowers and expanding homeownership.
Because Ginnie Mae is part of a government agency (Department of Housing and Development, HUD) its security issues are backed by the full faith and credit of the United States Treasury—essentially making them guaranteed investments without risk since the U.S. government is guaranteeing all interest and principal payments and the U.S. government has never defaulted on a payment obligation; there is some risk but the risk is that the federal government will go into default.
It is estimated that about 90% of mortgages in the United States are from either Fannie Mae, Freddie Mac or Ginnie Mae with several trillion dollars of mortgages currently outstanding.
Next week we will continue the series on how mortgages work by looking at pricing and rates of mortgages for borrowers and the following week will conclude the series with a look at how those rates and prices are determined by the financial markets.
Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.
Housing is dragging the economy along, thankfully. On Tuesday the Consumer Price Index for July was released and the report was not good. Prices were flat from June to July and from last July to this CPI increased on 0.8%–well below the Fed’s 2% target rate. Housing prices increased 0.3% for the month and are up 2.4% for the year, helping keep prices from going negative were medical care prices which were up 0.5% for the month and 4.0% from last July. For people looking to purchase a home and monitoring their medical insurance and expenses there is no surprise in the increases in either category. The news is extremely mortgage rate friendly as flat prices indicate a stagnant economy and continued low rates.
Rates for Friday August 19, 2016: Rates continue to lie on the floor and there is little evidence that they will get up any time soon. Take advantage of these rates!
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.25% Flat
30 year high-balance conforming 3.50% Flat
30 year FHA 3.00% *** Flat
30 year FHA high-balance 3.25% *** Flat
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have may have no points and credit towards closing costs, changes daily.
I guess when you have polarizing political candidates and world-wide athletic games with obligatory scandal both going on at the same time it can be hard to make the news. The tragic flooding going on in the Baton Rouge area of Louisiana however should push aside politics and at minimum share the media stage with the Olympics. The historic rain fall and flooding has created a tragic situation for those in the region and it seems it is of little interest to most Americans. Perhaps if there were wide spread looting and pillaging the networks might send a few cameras to the area….You can help, and it is needed. As always the Red Cross is a major supplier of needed items, from temporary housing to food and water to comfort.
If everyone who receives the Weekly Rate & Update makes a $25 (tax deductible) contribution to the effort that would be over $15,000 to the Red Cross for its needs in Louisiana. Here is the link if you are willing to contribute.
Thank you for your contribution, have a great week,
Dennis
