Today’s REI Classroom Lesson

Stephen Bighaus goes over recent changes for Fannie Mae and Freddie Mac, and what it means for investors.

REI Classroom Summary

After being in the spotlight during the last housing market crash, both Fannie Mae and Freddie Mac have reformed.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Steve: Good morning, Steve Bighaus, Security National Mortgage, host of the REI Classroom. And just wanted to talk with you a little bit this morning about several subjects. And I think the first subject that we’re going to be discussing is the future of Fannie Mae and Freddie Mac.
Mike: This REI Classroom Real Estate lesson is sponsored by
Steve: So there’s been a lot of discussion over the past couple of years about the futures of both these GSEs. And I think it’s really important to talk about. Several years back I’m sure there was a lot of talk about elimination of both of them. That they were going to wind them down and get rid of them.
A lot of us in the industry, and that kind of looked at that kind of scratching our heads a little bit as far as the, actually, if that’s really a practical solution. And if they did get rid of them, what would they replace them with? I mean would they replace them with the major banks? And we all know that’s not going to work. Because a lot of the discussion right now in that is trying to break up the big banks, you don’t want to make them bigger. Secondly, what do you replace it with? Do you replace it with another GSE, you just create another monster.
So the whole political talk during that time was political talk, that’s basically what it was. Wasn’t practical, wasn’t a solution. A little bit of brief background, Fannie Mae was created back in, I don’t know if a lot of people know this, Fannie Mae was created back in the ’30s. And the whole purpose of that was to create liquidity for banks and for mortgage lending.
Freddie Mac on the other hand was created in the’70s, another big GSE created for the same purpose. And over the years they’re probably right now, both them, probably the largest financial institutions in the world if you combine them. And they’re definitely at the top. So again, back to that is the idea as far as replacing them just wasn’t a practical solution.
Now, changes with Fannie Mae. One of the big issues that they had was back in the meltdown. Both Fannie and Freddie suffered huge losses. They were kind of quasi-government agencies. And I mean it was just big. So that’s when a lot of the talk started as far the elimination and it just continued on. I mean they suffered billions of dollars in losses. So over the years you can watch, now that the government has kind of taken them over, and they are full government agencies. So the thing to do in that is reform both.
So a lot of time in the mortgage securities, and that when Fannie would bundle these, they would guarantee the mortgages. So in other words, in that the government would guarantee the default risk. That is going to change in 2016. Now what Fannie and Freddie both are going to do is they’re going to sell the mortgage bonds. Fannie Mae’s are called Connecticut Avenue Securities.
Freddie Mac you’ve got Structured Agency Credit Risk. But what that’s going to do is that’s going to pass on a risk to the investor. So Fannie and Freddie are no longer going to take that risk with that. So that’s going to be huge. So that’s going to shift it, so in other words, in that basically the tax payers aren’t going to have to, if there are some big losses, another big meltdown, wouldn’t have to suffer those risks.
Of course one of the common questions that comes up with that, what stops it from having another meltdown? Like we did in the years past. Really when you look at it, back in the mid 2000s when we were doing the lending, we were basically doing credit card lending secured by a house. A lot of those people that bought those homes didn’t qualify in the first place.
Now you look at the quality of loans that we’re producing now, with both Fannie and Freddie, full doc, everything’s verified. Granted you can’t perceive every problem that’s going to happen. Things change in people’s financial pictures. But the quality of the securities is so much better than what it was in the past. And that’s going to reduce some of that risk.
I really like where the GSEs are going. Yet, in my opinion they’re not going anywhere. They’re here to stay. And what I’m going to do is close on that. It was a real pleasure to have that discussion with everybody this morning. And thank you very much.
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