If all you read is the headlines, you might think mortgage market giants Fannie Mae and Freddie Mac have cost the taxpayers billions. However, a deeper look into these two government-sponsored enterprises (GSEs) reveals a decades-long history of making mortgages more affordable, benefiting not just individual home owners, but whole communities.
Fannie Mae and Freddie Mac are federally chartered organizations designed to bring global capital to local communities by purchasing and guaranteeing loans made by mortgage lenders.
As a home owner, there are several ways you benefit from Fannie Mae and Freddie Mac. If your loan is owned or guaranteed by one of them, you pay a lower interest rate. And, when the time comes to sell your home, the pool of buyers capable of getting a mortgage is much wider thanks to Fannie Mae and Freddie Mac. To see how a loan guaranteed by one of the GSEs helps you save money, download our free PDF worksheet.
Home owners who qualify for a Fannie Mae or Freddie Mac mortgage, called a conventional loan, typically get interest rates that are ¼% to ½% lower than non-Fannie Mae, non-Freddie Mac loans. At times when other mortgage funding dries up, the rate difference between GSE and non-GSE loans has jumped to between 1% and 2%.
On average, home owners who have GSE loans save $17,000 over the life of a 30-year loan. Since 30 million Americans have a GSE-backed loan, that adds up to more than $500 billion in savings for U.S. home owners.
GSEs stabilize the market
Despite the financial advantage the GSEs create, not everyone supports their mission. Some critics worry that Fannie Mae and Freddie Mac are taking on too much financial risk by guaranteeing mortgages in the current economic climate. Others believe the GSEs should be purely private entities, functioning without an implied or explicit government guarantee at all.
Falling home prices and rising unemployment have challenged the GSEs. When the subprime mortgage crisis hit and expanded into the prime market, there was a sharp decline in home prices and a sharp increase in mortgage delinquencies and foreclosures. The crisis put extreme financial pressure on both Fannie Mae and Freddie Mac.
By mid-2010, the two companies had required $145 billion of taxpayer support. However, without those funds, the GSEs would have gone under, putting an end to the steady flow of funds into the U.S. mortgage market.
“Absent the engagement of the government through the GSEs and FHA, what was a bad situation would have been catastrophic for the housing market, and potentially catastrophic for the broader economy,” says Nicolas P. Retsinas, director of Harvard University’s Joint Center for Housing Studies and Freddie Mac board member.
Today, the GSEs remain one of the few reliable sources of home mortgage funding, along with mortgages insured by the Federal Housing Administration. In 2010, 80% of U.S. home loans were bought, or guaranteed, by Freddie Mac and Fannie Mae.
Congress sets a maximum Fannie Mae and Freddie Mac maximum loan limit. Home owners who need to sell find that there are more borrowers for homes priced at or below the GSE maximum loan amount, which is $417,000, or up to as much as $729,750 for some high-cost areas.
It can be hard for buyers to find lenders willing to lend more than the GSE loan limits because lenders have to hold such loans in their bank portfolio in the current financial situation. Until the recent financial crisis, lenders were able to sell mortgages above the GSE limits to companies that turned them into private mortgage-backed securities.
Until the summer of 2008, the nationwide loan limit was $417,000, far too low to be of use to many home owners and prospective homebuyers in California and other high cost areas, says U.S. Representative Brad Sherman (D-Calif.), who has proposed legislation raising the loan limits permanently to $729,750.
“Buyers in high cost areas, such as Southern California, are at an extreme disadvantage simply because of where they choose to work and live,” he says. “For the overall economy to recover, every part of the housing market needs to improve, including high cost areas.”
Higher loan limits can also help homesellers. If the limits correspond to market values, buyers can use less-expensive GSE loans, so the number of buyers who can afford your home increases. With more potential buyers, competition for individual properties increases. With more competition, the value of the property can increase.
In the final analysis, the benefits of the GSEs outweigh the cost. Their long track record of making mortgages available in all markets benefits home owners, communities, and the nation as a whole.