Fannie & Freddie Can't Help Either

If you haven't already done so, check out my nesteggr post Bush, FHA, & Pipe Dreams to get an idea of how I feel about the modernization of FHA and the "help" it will render.

Here, I will focus on Fannie Mae & Freddie Mac, the two cousin government sponsored enterprises (GSE) and how some democrats are still calling for Fannie and Freddie to be allowed to increase the size of their portfolios and increase the conforming loan limit which is currently at $417,000.

My issues are as follows:

1) Uh, did anyone notice that Freddie Mac released their earnings yesterday? And that those earning reports were not good? Revenue was down 45% and provisions for loan losses increased by $320 million. I was shocked yesterday that this did not cause a bigger stir than it did. Ok, so their overall portfolio comparable to others in the mortgage market is good but the $320 million was an increase of over 400%. How is that no big deal?

If Fannie or Freddie run into liquidity problems due to defaults...you want to talk about a credit crunch? Nobody will be doing loans. Many people believe the government would bail them out. While that is most likely true, it isn't a fact. Fannie or Freddie could fail.

2) Raising the conforming loan limit only helps a small portion of homeowners. The conforming loan limit is $417,000. That means this is the biggest loan amount that Fannie or Freddie will invest in (buy). Anything above $417 is considered a "jumbo" loan. Raising the conforming loan limit only helps a small portion of the mortgage market. The current median home price in the United States is 223,800 (half of homes are above this price, half below). Most homes, in most parts of the country, should comfortably fit into the conforming loan limits.

Outside of the costs, and some large cities, if you have a $500,000 home (for example), you are considered "well off". If you are indeed "well off", you should have enough money to handle adjustments in your payments. If not, you over extended yourself, you didn't plan, and I don't feel sorry for you.

3) Fannie and Freddie are also pulling in the reins on their financing options. Both recently increased their pricing for their flagship products the MyCommunityMortgage (Fannie) and Home Possible (Freddie). Fannie also announced that they are discontinuing some of their Expanded Approval (EA) products on higher loan to value loans. Not only that but Fannie has raised their pricing on all EA loans regardless of loan to value. Fannie Mae has touted their EA program as an alternative to sub-prime lending. So much for that.

Consider those facts, along with neither company has fully recovered from their accounting issues in the past couple of years to earn the responsibility of expanding their portfolios. I think President Bush said it best a few weeks ago, "Fannie and Freddie are Fannie and Freddie." That is really all you can say.