The housing market is always fluctuating. When the market is down, it puts those who own a home in a position where selling can be an impossible and daunting task. And for those who want to be home owners, a down turned housing market can keep them trapped in a rental way of life. Fannie Mae and Freddie Mac have been making owning a home easier for buyers for years by helping them achieve loans they may not be able to get through a conventional loan.
Fannie Mae and Freddie Mac
Created by congress, Fannie Mae and Freddie Mac are a major part of the nation’s housing finance system with the function of providing stability, liquidity, and affordability to the home loan and mortgage market. Fannie Mae and Freddie Mac provide an access to monies to thousands of financial institutions that make loans for financing housing; banks, savings and loans, as well as mortgage companies, which is done under reasonable terms.
Fannie Mae and Freddie Mac will do one of two things when they acquire a loan from a lender. They will either hold onto the loan in their portfolio or they will package the loan into a MBS, (Mortgage Backed Securities) that can be sold. Lenders then are able to use the monies attained from the sale of these loans to generate more loans. By the GSE’s (Government Sponsored Enterprises), purchasing loans, it ensures that families wanting to buy homes and investors looking to buy apartment buildings will have a stead and unending supply of mortgage funds.
Fannie Mae and Freddie Mac are strong stabilizers in the housing market. They protect housing during downward times when the extended financial system is chaotic and under stress and threatened by the economy. Because the Enterprise supports mortgage lending that backs affordable housing, it reduces the cost of this type of borrowing.
Who regulates Fannie Mae and Freddie Mac?
The FAHA regulates Fannie Mae and Freddie Mac along with 11 Federal Home Loan Banks and is an independent federal agency that is the result of the merger of multiple enterprises; the Federal Housing Finance Board (FHFB), the Office of Federal Housing Enterprise Oversight (OFHEO), and the Department of Housing and Urban Development. The FAHA was put under the conservatorship of the FAHA on September 7, 2008. Once the law was signed, the director of FHFA made a commitment to ensure that the housing GSEs would operate safely and soundly to provide affordable housing with stability and liquidity to those in the market of home purchasing and seeking home loans.
Two of the nine actions associated with putting Fannie Mae and Freddie Mac under the conservatorship of the FAHA include:
- There will be stronger backing for the holders of Mortgage Backed Securities (MBS), or senior debt and subordinated debt.
- The two enterprises will be allowed to grow their guarantee MBS books without limitations. They will also be able to purchase replacement securities for their portfolios without capital constraints, which is approximately $20 billion a month.
Conforming mortgage loan limit
Every year the FAHA is supposed to assess the housing market and adjust the conforming mortgage loan limit accordingly. The conforming mortgage loan limit is simply the limit amount in which buyers are allowed to borrow. When home prices sunk in the housing market crisis during the early millennium, they continued to stay down and did not begin to recover until recently. At the time of the crisis, the conforming loan limit, or the maximum amount that buyers can borrow in either a Fannie Mae or Freddie Mac-backed loan for a one-unit property was set at $417,000 and due to this housing market crash, the Housing and Economic Recovery Act of 2008 (HERA), forbade any increase in the conforming loan amount until U.S. home prices recovered to where they were prior to the crisis. Today home prices have recovered, and because they have, the FHFA raised the conforming loan limit this year to $424,100; the first increase the conforming loan limit has seen since 2006.
In counties where the cost of living is much higher, the conforming loan amount will come with an exception. HERA set a ceiling on the conforming loan amount for high-cost-of-living counties at 150% of the baseline loan limit which will help those who live in these counties to be able to attain a loan and achieve homeownership along with those in lower costing counties.
Another benefit of this recent increase is the help that it will give to those who are first-time or lower-income borrowers living in high-cost housing markets and are looking to get help from FHA in attaining a mortgage. Despite the increase, there is still a clinch on credit and it does remain tight; however, this decision to increase the conforming loan amount will give qualified buyers the ability to get over the hurdles that may be standing between them and homeownership, one of which is high costs and lower income. These potential homeowners have been waiting years for this to happen so that they can finally become homeowners and get out of the rental trap.
The FHFA recognizes that this increase is one that will not only affect those living in higher cost of living areas in California, but all higher-cost areas in each state across the nation. This new increase will help tens of thousands of Californians alone to reach their dream of being homeowners. And with that many being helped in California, alone, it will be interesting to see the figures climb as more and more people across the country begin to put their dreams in action and apply for mortgage loans so that they too, can become homeowners.
As of now, things only look positive in the housing market from raising the mortgage loan limit. Those wanting to attain a loan higher than this set amount will have to attain a non-conforming loan where interest rates can run a bit higher. Because there hasn’t been an increase in ten years, financial entities and the FHFA will have to wait to hear from lenders how things are going with the new limit, until then, those who have always dreamed of owning a home and have been waiting for this moment, now’s your chance.