I just don’t understand why Fannie Mae and Freddie Mac continue to get funding from the U.S. Government to purchase even more mortgages, given the hundreds of billions of dollars they have already lost in this “business line”.
In September, we closed on a mortgage loan with Fifth Third Bank and received an unbelievably low interest rate, which made us very happy. It was so low that I commented to the banker that they were “giving away money”. As part of the closing paperwork, a statement from Fifth Third said that they had not sold any mortgages to others in the recent past and have no plans to do so in the future at this time. That was late September 2010.
Yesterday, we received a letter from Freddie Mac, the “governmental sponsored entity” or GSE that, like Fannie Mae, purchase mortgages then repackage them as securities and sell them to investors. They informed us that they had purchased our loan from Fifth Third Bank. What??? This is the same Freddie that just announced last week that lost $14 billion so far in 2010. Why are they buying more mortages, especially low interest loans when everyone knows interest rates will be rising soon? Won’t rising rates mean that Freddie will have to lose money if they resell the mortgage to an investor?
Both Fannie Mae and Freddie Mac were established by Congress years ago to “facilitate financing” of home loans. Because of the implied backing of the U.S. Government, their securities in theory were lower risk to securities investors and therefore could contain a lower interest rate paid to investors. This supposedly provided a way for the government to help banks and homeowners by purchasing the mortgages and freeing up the bank to lend more money. Homeowners would benefit from the government keeping the mortgage market liquid. That was … until the 2008 mortgage meltdown. When Congress forced Fannie and Freddie to increase the loans given to low income (including “no documentation required” loans), things blew up when people couldn’t pay up. So much for violating common sense economic prinicples – – you don’t lend money if the person can’t pay it back.
So what is happening here? Freddie buys my low-interest loan from Fifth Third Bank in November. Fifth Third can now lend that money to another homeowner, and Freddie has my loan on their books. But in early 2011, interest rates may begin to rise due to inflationary pressures brought about by excessive governmental borrowing ($14 trillion so far) combined with the Federal Reserve “quantitative easing” policy (meaning, devaluating the dollar’s value by printing $600 billion in new money and using it to buy U.S. Treasury bills – – essentially financing more debt with money that has no real backing). But Freddie has to turn my loan into a security they can sell to an investor, to recover their money. The investor, however, wants a higher interest rate than I am paying on my loan because the dollar has been devalued by 10% in November/December, and inflation is rising. Sounds like the common sense of economics is going to impact someone! What can Freddie do?
Freddie Mac will have to take a loss on my loan to securitize it and sell it to an investor along with a batch of similar loans. This means that taxpayers — meaning you and me – – – will need to kick in even more tax money to “save” Freddie from itself.
Why does the Government continue this madness? Why do we continue to allow our representatives to fund this ponzi scheme? Sure, I got a low-interest loan, but your taxes and my taxes are going to have to pay for it since we (the U.S. Government) own Freddie and Fannie. This must stop. I would rather keep my taxes in my pocket and pay a “market” rate of interest when I borrow money than to pay for this whole Fannie/Freddie shell game. Imagine how many people and computers it takes to buy and sell your mortgage — what is the real benefit?