Changes for Fannie and Freddie

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Real Estate Agent with Calcagni Real Estate, Hamden, Connecticut Connecticut REB.0750397

While this sounds like the latest book in a series of children's stories, the ending to this volume is uncertain, at best. The U. S. financial system was able to dodge the bullet due to massive govenment intervention in the past year and a half. Huge infusions of money kept banks "liquid", and for the most part, consumers today are able to do banking as usual. There are, however, dark clouds building on the horizon, that may pose a threat to banks, lending, and in the long run, people's ability to get affordable mortgages.

Fannie Mae and Freddie Mac, which were created to provide local banks with funds for affordable mortgages, were taken over by the federal government on 9/8/08. Today they are still facing huge losses. They currently hold over $300 Billion in loans that are 90 days or more delinquent. Without the tax payer bailout (TARP), the companies would be insolvent and out of business. The Federal Housing Finance Agency (FHA), which oversees Freddie and Fannie, is cracking down on lending practices and tightening procedures. FHA will no longer allow Fannie and Freddie to issue new loan products. FHA will also require affiliated lenders shown to have made errors in lending, to repurchase the loans and carry them on their own books as bad loans. This will further weaken banks' balance sheets.

This morning's headlines bring up the recurring nightmare of troubled commercial loans. Small community banks, which make many of these loans, face cash flow problems as commercial loans default. As these banks add to loan loss reserves , there will be less money to lend to small businesses, which create jobs in their  communities. Mortgage money will also be harder to come by. All this leads to a tighter supply of money, and a rise in interest rates, unless the government once again intervenes. What a convoluted, circular tale. Further volumes to follow............

 

 

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Millie C. Legenhausen

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