Fannie Mae and Freddie Mac - Who Needs Them?

Why do we need Fannie Mae and Freddie Mac in the first place? And why are they in the news so much lately? In this writer's opinion, both organizations should be left alone to die. But I'll try to remain objective as we investigate the world of Fannie and Freddie ...

Who the Heck Are Fannie and Freddie?

While they may sound like the distant aunt and uncle you never knew you hand, Fannie Mae and Freddie Mac are actually big corporations.

Fannie Mae is Born

Fannie Mae (formally the Federal National Mortgage Corporation, or FNMA) was created by a congressional mandate back in 1938. That's right, history buffs ... at the tail end of the Great Depression. Basically, it was — and sort of still is — a program designed to extend home loans to a greater number of Americans by (A) providing federal funding to banks and (B) creating a secondary market where mortgage loans could be sold off to investors.

During and after the Depression, the U.S. housing market collapsed. As a result, mortgage lenders were stricter with their lending practices, only offering loans to the best qualified of applicants. Sound familiar? But when Fannie Mae came onto the scene, lenders did not have to worry as much about such "trivial" concerns. They were able to offer mortgage loans to people who would never have qualified before.

For about the first 30 years of its existence, Fannie Mae was a federal institution with no competition whatsoever. It had basically created the secondary mortgage market, so there were no other institutions that could compete with it in that area.

In 1968, Lyndon B. Johnson privatized Fannie Mae to get it off the "government books." So now you had a private company that received federal support and monopolized a certain area of American industry. Well, Americans historically do not like monopolies (unless you're part of the monopoly), so the federal government created Freddie Mac to perform the same basic function as Fannie Mae ... thus preventing the monopoly.

If you think this is a little bizarre, you're not alone. In a sense, Fannie Mae and Freddie Mac are like two government-created Frankenstein's monsters. We created the first monster, but it got too powerful. So we did the only logical thing — we created another monster to compete with the first. The Bride of Frankenstein revisited.

And Freddie Mac Too

The "Freddie" of this equation is the Federal Home Loan Mortgage Corporation (FHLMC), which for some reason is called Freddie Mac for short. So what does this bloated organization with questionable accounting practices do? Basically, they do the same thing as Fannie Mae (see notes about monopoly and Frankenstein above).

Today, Fannie and Freddie both buy mortgages from lending institutions, "package" them with other financial products, and then sell them to investors throughout the world, from Europe to Asia and most points in between.

What's the purpose of this, you ask? Good question!

As touched on above, the purpose behind Freddie Mac and Fannie Mae is to extend homeownership to more Americans. You see, if Freddie and Fannie weren't there to purchase mortgage loans from lending institutions, there wouldn't be much of a secondary mortgage market. In that case, mortgage lenders would be a lot stricter about who they gave money to.

So without Freddie and Fannie, a person with bad credit and a shaky financial history would be turned away by mortgage lenders. No house for you today. Sorry. Better go play the lottery. But with Freddie Mac and Fannie Mae, mortgage lenders can offer loans to a wider range of people, even the ones they deem a credit risk. That's because they know there's a good chance they can sell off the loan to Freddie Mac.

Obviously, this liberates the mortgage lender from any concerns they might have had about getting their money back. For example, if they sell the loan to Freddie Mac, who in turn sells it off to some Asian bank ... what does the lender care if the borrower defaults on the loan? That's right, they don't care. So, because of Freddie Mac and Fannie Mae, the lenders can offer mortgage loans to people they wouldn't normally consider. Make the loan. Sell it to the secondary market. Wipe your hands clean of any future repercussions or defaults. Nice and neat!

Oh yeah, and during this process, the folks at Freddie Mac and Fannie Mae make a ton of money! In addition to their government sponsorship (and sometimes complete bailouts), these organizations make millions each year from selling off the loans. Witness — the CEO of Freddie Mac made nearly $20 million in 2007 (while the company itself was dropping stock value like a bad habit).

What About Home Buyers?

So what does all of this have to do with a person buying a home these days? Well, suffice it to say that if Freddie and Fannie went belly-up, it would be even tougher to obtain a mortgage loan. It's already tougher in the wake of the subprime crisis that came to a boil last year. Buyers need much higher credit scores these days in order to qualify for the lowest rates on a mortgage loan. Without a secondary mortgage market, that could tighten even more.

But Who Really Benefits?

Some people in the government feel that homeownership should be made available to just about everyone. Hence, we have organizations like Fannie and Freddie to encourage lending to a larger pool of Americans.

But the hard truth is that some people just cannot afford to own a home. Period. If a person has a low credit score as the result of a bad financial history, the last thing they should do is buy a home. Especially a home they know they can't afford. They're only going to make their financial situation worse, because they will pay incredibly high interest rates on the new mortgage loan (as a result of having bad credit).

This is part of the reason we have record numbers of home foreclosures right now. Banks are giving mortgages to people who have no business taking on a mortgage.

So let's take a quick tally of who really benefits from the existence of Freddie Mac and Fannie Mae. Well, the people running these companies certainly benefit. The make millions in salary each year. The foreign investors certainly benefit -- at least in the beginning.

But do consumers benefit? Well, if you are one of the people who got into a new home courtesy of the secondary mortgage market, and you subsequently lost that home when the adjustable interest rate skyrocketed ... you might not feel so lucky. You may have wished somebody told you, "No, you should not own a home right now. You should fix your finances and your credit score first."

And if you've been paying attention, the federal government is more interested in bailing out private organizations and lenders ... but they don't care much about the millions of Americans who have lost their homes.

What about the country as a whole? How do we benefit from the existence of Freddie Mac and Fannie Mae? In reality, not very much. As a result of the secondary mortgage market and money pits like the war in Iraq, we are more indebted to foreign banks now than we ever have been.

So should we pump additional tax dollars into Fannie Mae and Freddie Mac to keep them afloat? Should we keep giving mortgage loans to people who simply cannot afford them? Should we plant the seeds for the next mortgage crisis and recession?

I say no. I say the hell with Freddie and Fannie. In the long run, we are much better off without them.

Getting the Lowest Mortgage Rates

All home buyers want the lowest mortgage rates when applying for a home loan, because it directly translates to a smaller mortgage payment each month.

And who doesn't want to shrink the size of their monthly payments?

But how does one obtain the lowest rates on a mortgage loan and, for that matter, why is it important in the first place? These are the subjects we will discuss in this tutorial for first-time home buyers.

Why Low Rates Are Important

First off, let's clear up some terminology here. When we talk about getting the lowest mortgage rates in this context, we are referring to the interest rate a lender offers you as part of your mortgage loan. Interest is a primary component of a home loan. It's the "I' in the acronym PITI (which stands for principal, interest, taxes and insurance).

By the way, you can learn more about this kind of terminology from our mortgage glossary on the main website.

In other words, the interest rate is one of the factors that will determine the size of your monthly mortgage payment. Now you can see why it's important to seek out the lowest interest mortgage rates when applying for a loan.

How Your Credit Score Relates

When you apply for a home loan, you be sure that the mortgage lender will request your credit reports and scores from all three of the credit-reporting companies (Experian, Equifax and TransUnion). Your credit score is one of the major factors that will determine the kind of interest rate they offer you.

Lenders reserve the best / lowest mortgage rates for borrowers who fall into a certain credit category. What score you need to qualify for this category will vary from one lender to another, but it's safe to say that the better (higher) your credit score, the lower the mortgage rate you'll receive.

Here's something not many home buyers realize. Over the last few years, the score needed to qualify for the best rates on a loan has risen. This is largely due to tougher restrictions on mortgage lenders (as a result of subprime mortgage crisis of 2007 - 2008). Today, buyers need a higher credit score to qualify for the lowest rates on a home mortgage loan.

Housing Market Recovery - 3 People to Ignore

There sure are a lot of people talking about the housing market lately, particularly on the subject of housing market recovery and economic rebound. When you look at recent trends in the real estate industry, it's easy to understand why there is so much buzz.

But it's also important to understand the difference between information and misinformation when it comes to housing market recovery -- or any other economic topic, for that matter. A home buyer in today's economy will be bombarded with conflicting information from all sides. The housing market is good. The housing market is bad. We are in a recovery period. We are still plummeting. Prices are climbing. Prices are dropping. It's enough to make you crazy.

But you can keep yourself sane by knowing which information sources to take with a grain of salt. To that end, here are some people worthy of skepticism when it comes to the housing market recovery and similar topics.

1. President George W. Bush

The president likes to say that we are going through a "rough patch." A bit of a hiccup, eh George? Now, I understand the need for positive thinking at such high levels. But a president who doesn't recognize and/or admit a full-on recession ... well, that's just scary.

There are other reasons George W. Bush cannot be trusted on the subject of housing market recovery and similar topics. For one thing, the subprime mortgage lenders helped pay for his presidential campaign. Yes, the same lenders who helped drive the country into a foreclosure crisis.

For example, it is a matter of public record that Roland Arnall (a billionaire executive from the Ameriquest subprime lending company) was one of Bush's top fundraisers. So any proposed legislation that would have curtailed the days of "subprime lending gone wild" met with stiff resistance from the then-Republican-controlled Congress and White House.

Ameriquest has also settled a lawsuit that accused them of deceptive lending practices. What does GW do? He appoints Ameriquest founder Roland Arnall to be ambassador to the Netherlands. Seriously, George? Are you sure you didn't mean to say the "nether regions"?

So when you see President Bush or one of his mouthpieces talking about the economy as a whole, or housing market recovery in particular ... take it with a grain of salt.

2. Anyone From Fox News

Sorry, right-wingers, but Fox is the most biased, one-sided news program on television in the United States. Come on now, admit it. When is the last time you heard them say anything good about a democrat, or bad about a republican? Fox News also loves to crank up the shock value, and they are widely known for shaping the "facts" to suit their transparent agendas.

So when you see anyone from Fox News talking about the housing market in any way, shape or form ... take it with a grain of salt.

3. The National Association of Realtors(r)

It always amazes me to see most news outlets in the country citing a nationwide drop in home sales, while at the same time the NAR proclaims a national rise in home sales. Now, I'm not accusing them of lying, but there is something to keep in mind here. Most of the data they use for their national "analysis" of the housing market is proprietary data from within their own organization. In fact, the NAR just went through a prolonged lawsuit with the Department of Justice over the management of their data, and whether it violates antitrust laws.

So when you see this organization (who has a vested interest in home sales) talking about housing market recovery ... take it with a grain of salt.

A Final Word of Advice

In closing, I would also warn you against giving too much credence to the real estate commentary of your neighbors, your coworkers, your hairdresser, the checkout guy at the grocery store, or your sister's husband's former college roommate who knows a guy who knows a girl who once worked for a real estate company.

In real estate, as with everything else in life, there are many people who mistake their opinions for fact. There are also many people who skew the facts to serve some kind of personal agenda. And with the speed and reach of the Internet, it doesn't take much to create full-fledged hysteria about the housing market or any other topic.

Dig deeper for the truth. Be a smart and skeptical consumer. Take what other people say with a grain of salt. Do your own research and form your own opinions. When somebody makes a statement about the housing market, ask yourself where their interests lie. Be a rational, free-thinking, intelligent individual. The economy can only benefit from having more people like that.

Brandon Cornett is the publisher of the Home Buying Institute, which educates consumers on how to buy a home, how to choose a mortgage, how to stop foreclosure and related topics. Learn more about this topic at http://www.homebuyinginstitute.com

Home Buying Tips for the Internet Age

The Internet has made the house-hunting process faster and easier by putting a wealth of information at your fingertips. Literally. But many home buyers don't realize the many ways that web technology can help them. So let's take a look at some of the ways you can use the Internet to simplify your home search process.

1. Hire a Modern, Web-Savvy Agent

As far as Internet technology goes, there are two types of real estate agents. The first type view the Internet as a "gadget" that's not worth their time to learn. They use the Multiple Listing Service (MLS), and only that service. They are not web-savvy and therefore have a limited view of the real estate world around them.

The second type of agent is often part of the new generation of web-savvy real estate professionals. This agent knows the value of the Internet, and is "wired" into all of the major home-search websites, among other things. This agent can help you find and research properties more quickly by using the power of Internet technology. He or she is probably pretty handy with digital cameras, virtual tour technology, and other useful tools as well.

2. Use the Big Home-Search Websites

Over the years, real estate search engines have exploded both in quantity and complexity. These days, you can visit one of these websites and gain instant access to local property listings, recent sales data in your area, and more. This is an excellent way to screen houses before you visit them, which can save you a lot of time and energy.

For example, if you only saw a black-and-white photo of a home in the newspaper, you wouldn't know what the inside rooms looked like. You would have to visit the property to find out. These days, however, you can use virtual tours and photo galleries to preview nearly every corner of a house. If it doesn't match your needs, you don't waste your time with a visit. Now that's using technology to your advantage!

3. Use Your Local Newspaper's Website

Most city newspapers have an online version of their news as well. For example, here in Austin, Texas, I can visit the Austin-American Statesman website to get information about the local real estate market, homes for sale, new subdivisions being built and more. Sure, the Sunday paper has a lot of this information. But why wait until Sunday?

4. Read Local Real Estate Blogs

Many real estate agents and companies have begun to use blogs as a way of publishing information online. A blog is like a website, only the information is presented in chronological format like a journal. Many agents use their real estate blogs to publish updates about the local market, new homes they have listed and more. An agent's blog is almost always more up-to-date than the main website. So they can be a good source for timely real estate info in your area. You can find them by doing a Google search for your city name plus "real estate blogs."

5. Use Your Email Network

Do you know a lot of people who live in the area where you want to buy? Friends, family and coworkers perhaps? If so, send them an email to let them know you're looking for a home in the area. If they see homes for sale in that area, they can email you about them. Essentially, you are creating your own house-hunting "army" to help you stay on top of things.

This can be especially useful in a hot market where homes sell fast. For example, imagine the following scenario:

Jane knows that her friend Sally is looking for a nice one-story home in the Shady Lane area. On her way to work one morning, Jane passes a "for sale" sign in front of a nice one-story home in that area. She pulls over to the curb, snaps a picture with her camera phone, and sends it to Sally. In turn, Sally emails it to her real estate agent who meets her there at lunchtime to view the home. This is a prime example of how technology can help you stay ahead of the curve when shopping for a home.

Brandon Cornett is an Austin real estate writer who publishes information on Austin, Texas homes and similar topics.

Getting Mortgage Quotes Online - The Safe and Smart Way

For better or worse, the Internet has altered everything about the real estate process. And that includes the way we shop for loans. These days, you can use the Internet to save time and energy by shopping for mortgage quotes online and comparing lenders. But there's a right way and a wrong way to go about it.

The Benefits of Online Quotes

Why should you bother obtaining mortgage quotes online in the first place? There are many reasons, actually. But let's focus on the primary advantages of the online quoting process.

The most obvious benefit is the convenience factor. Before mortgage lenders embraced the Internet as a business tool, you had to spend a lot of time on the phone if you wanted quotes from multiple lenders at once. Or even worse, you had to drive all over town.

By using the Web, however, you can complete an online form at one of the big mortgage websites and get quotes / offers from several lenders in response. Clearly, this saves you a lot of time and energy.

For example: Click on the "Find a Mortgage Loan" link in the upper-right corner of the blog, and you'll see firsthand how simple the process can be.

But there are other advantages to using the Internet for mortgage quotes. You also gain access to a broader range of mortgage products when you go online to obtain quotes. Different lenders offer different mortgage packages and terms. So by using the Internet, you can gather information on a wider variety of options. As a result, you'll probably have a better chance of finding a mortgage product that matches your financial needs.

Being Smart About the Process

Anytime you reveal personal information via the Web, you have to be smart about protecting your identity from theft and fraud. Obviously, this applies to mortgage quotes online as well. So let's talk about the ways you can be a smart consumer when shopping for offers via the Web.

1. Use Trusted Websites -- The big mortgage names you see on TV all the time are usually your best option, in terms of safety and security. These companies have a lot at stake, so they take things like Internet security very seriously. In other words, stay away from "Al's Mortgage Warehouse" and other shady websites.

2. Learn Your Credit Score -- You should go into this process knowing what your credit score is. When you request mortgage quotes online from multiple lenders, they will present you with some basic information. But they can't qualify you for a loan, or determine the interest rate they'll offer you, until they have conducted a more formal review of your credit and financial history. So if you know your credit score in advance (and whether you are at, below or above the average), you'll be able to determine how realistic those quotes are.

3. Determine Your Own Budget -- Don't let a lending institution tell you what you can or cannot afford, in terms of a monthly mortgage payment. You have to determine that for yourself. A lender can only tell you how much of a loan they'll offer you -- not how much you can realistically afford. So use mortgage calculators (you can find them all over the Web) and other budgeting tools to find out what your limits are with monthly payments.

Online Mortgage Quote Conclusion

The Internet can certainly save you a lot of time when shopping for a home loan. It can also open up a wider range of mortgage products and terms. But like any other financial process, you have to be smart about getting quotes online. Stick with reputable companies and websites. Conduct a financial self-assessment of your own. Read all the fine print. A little homework goes a long way in this department.