High foreclosure rates across the country as well as a faltering financial sector has dictated government involvement in the mortgage industry. This involvement has facilitated growth in both residential and commercial real estate such as Minnesota real estate and has created more favourable and secure lending situations for financial institutions. All this has been done in order to stimulate economic growth in the United States.
The growth of the federal government's involvement since the onset of the mortgage crisis has created a situation in which the government has become a substantial pillar to the survival of the mortgage industry. Government has taken on much of the risk formerly assumed by lenders and has essentially become the mortgage market. With the power to set the terms that allow mortgages to be approved and their ability to own a proprietary share of many companies this government involvement now has the taxpayer shouldering a substantial part of the risk associated with lending in an uncertain economy.
The Federal National Mortgage Association and the Federal Home Mortgage Corporation have operated as government sponsored enterprises. These institutions are better known publicly as Fannie Mae and Freddie Mac. Although both institutions report to their shareholders they are protected financially and supported by the federal government. These safeguards include a line of credit through the U.S. Treasury, an exemption from state and local income taxes as well as an exemption from the Securities Exchange Commission (SEC) oversight. Their history has shaped the mortgage industry since the 1930's and continued support by the federal government is essential to restabilising the economy and the housing markets across the U.S..
Fannie Mae was created in 1938 as President Franklin Roosevelt's New Deal. The creation of the Federal National Mortgage Association was to ensure that mortgages were made more available to lower income families and to facilitate liquidity in the mortgage market. In 1968 the federal government converted Fannie Mae to a shareholder owned corporation in order to remove its transaction from the federal balance sheet. In order to create a competing the federal government formed the Federal Home Loan Mortgage Association in 1970. The idea was that competition would create a more robust secondary mortgage market.
The way Freddie Mac and Fannie Mae work is that they buy loans from approved mortgage sellers. These loans are traded either for cash or mortgage backed securities which guarantee payment of principal and interest. Mortgage sellers in turn can either sell or keep the securities. These companies also bundle mortgage backed securities from their own portfolios to investors in the secondary mortgage market. In order for Fannie Mae and Freddie Mac to guarantee their mortgage backed securities they set the lending terms and guidelines that determine which loan applications can be accepted for purchase. To simplify the role of Freddie Mac and Fannie Mae is to say that they provide financial institutions with the money to provide new loans.
The 2007 sub-prime mortgage crisis found a lot of low income borrowers some with poor credit were unable to pay their mortgages. Almost 80% of mortgages issued to the sub-prime borrowers were adjustable rate mortgages (ARM). With home prices peaking in 2006 home prices began to decline. Values continue to decline as these high risk borrowers could no longer afford their homes due to steep increases in the payments of ARM mortgages.
This caused an explosion of foreclosures across the country. Again the situation was compounded by problems with the Auto industry and the failure of economic icons such as Bearr Stearns, The Goldman Sachs Group, Citigroup Inc. and even Freddie Mac and Fannie Mae. Home prices accelerated their descent as foreclosures increases, jobs were lost and the countries financial situation teetered on the brink of disaster.
As a result lenders began to employ much stricter standards for loans. A shell shocked lending industry was not equipped to respond to financial failures of this level and they essentially shut off the flow of money available for loans. The federal government was forced to step in to bolster confidence. The Treasury Department and Federal Reserve were given the authority to grant access to low-interest loans and removed the prohibition on the Federal Reserve to purchase stock in Government Sponsored Enterprises. Despite these efforts the economy continued on its downward trajectory.
Currently government involvement has extended programs to reinvigorate the mortgage industry. There are no longer institutions offering mortgage terms that do not require a down payment. But federal programs are in place that assist with down payments for lower income families as low as 3% of the home's value. Government backed mortgage insurance has made this possible by insuring that lenders are protected in the event of default on loans with limited equity in the home.
The federally backed Hope For Homeowners program offers a glimmer of hope for struggling homeowners hoping to avoid foreclosure. The program allows homeowners to refinance their home at more favourable terms with a fixed rate mortgage backed by the Federal Housing Administration (FHA). Lenders have to agree however to take a substantial loss on their original loan but at least are guaranteed a partial pay off and avoid costly foreclosure proceedings.
The federal government has also extend tax credits to home buyers in order to stimulate growth. The Worker, Homeownership and Business Assistance Act of 2009 has extended a valuable income tax credit. This incentive has stimulated the housing industry and brought some hope back to struggling home sellers languishing in struggling markets.
The Home Affordable Refinance Program is designed provide more affordable loans to existing mortgage holders in good standing. By providing Freddie Mac and Fannie Mae guaranteed mortgages borrowers can refinance at a more affordable monthly payment. It is hoped that this program will save 3 to 4 million families from avoidable foreclosure.
Federal programs now operate as the only means to provide a stable loan marketplace. Without federal involvement corporate and personal finances would be crippled by the inability to obtain affordable, secure and stable financing. Programs such as Asset Guarantee Program, the Home Affordable Modification Program and the Public-Private Investment Program have bridged a period filled with financial uncertainty and have allowed provided much needed support to an industry crippled by its own practices.
The growth of the federal government's involvement since the onset of the mortgage crisis has created a situation where the government no longer just supports the mortgage market but rather has become a substantial pillar to the survival of the mortgage industry. The government has taken on much of the risk that was previously assumed by lenders and has essentially become the mortgage market. They have the power to set the terms that allow mortgages to be approved and they own a proprietary share of many companies that are major players in the mortgage industry. This government involvement now has the taxpayer shouldering a substantial part of the risk associated with lending in an uncertain economy.
Someday the federal government will be able to limit its involvement in the mortgage industry. But for the time being their support is necessary to reinvigorate the economy and stimulate growth in both residential and commercial real estate sector.