I love learning new words, and I love applying those new words to anything in real estate. My new word is chimera, which is from Greek mythology and is a fire-breathing female monster. Now before you start with the female jokes, chimera is also a thing that is hoped or wished for but, in fact, is illusory or impossible to achieve.
There was a time in this country when mortgages were not easy to come by. Typically, if you wanted a mortgage to finance a home, they were short term loans with very large down payments, balloon payments and floating rates. The creation of the 30-year fixed-rate mortgage came about after the Great Depression and was part of The New Deal which established the Federal Housing Administration (FHA), setting up 15- and 30-year mortgages. Subsequent to that in 1938, Fannie Mae was launched as a way to free up mortgage money making it more available to Americans.
Fannie Mae and then Freddie Mac were created to encourage banks to make more home loans by backing the loans with federal guarantees, thus removing almost all of the home lending risk. These mortgages were then packaged into securities and sold to investors.
This was a great system until it wasn’t. A major part of why the financial crisis happened is because non-conforming loans were given to buyers who were essentially not qualified by lending institutions that were not verifying their ability to repay the loan. All of these subprime mortgages were sold as securities to investors who knew that Freddie and Fannie were assuming the risk backed by the federal government.
When the house of cards finally fell down, Fannie and Freddie were put under government conservatorship in 2008, fundamentally using your tax dollars to bail them out. So here we are now with about half of the home loans today still being backed by Fannie and Freddie.
There’s no question that these government-backed agencies have done their part in creating the American lifestyle and dream of home ownership, but is it time for an overhaul of the system? In favor of keeping the status quo, lawmakers point out that that government has a responsibility to keep housing affordable for both individuals’ ability to build wealth and allowing businesses that depend on homeownership to thrive. Also, they point out that banks don’t want to keep loans on their books and, if Fannie and Freddie are dismantled, banks would rethink making loans if the economy starts to slow down drying up available mortgage funds.
On the other hand, some say the government shouldn’t assume the risk associated with home ownership and more competition in the form of private equity would be a better mix. No one wants a replay of 2008.
Over the last 10 years, there have been innumerable arguments between lawmakers and government officials about how to proceed going forward and how big Fannie and Freddie should be allowed to become. Some say part of their business should be returned to private institutions, and some say they should not exist at all. None of this will be resolved anytime soon.
However, if your chimera is owning your home, it’s actually a good time to buy. Interest rates have dropped below 4 percent for the first time since early last year, and the Federal Reserve is holding steady with the prime rate for now.
Whatever happens between the federal government and Fannie Mae and Freddie Mac isn’t your problem right now; embrace the illusion and buy a house.
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