Posts Tagged ‘ mortgage ’

What Is Really Happening With Fannie & Freddie!


If you’re a mortgage borrower your great goal in life is to get a lower rate. While 2012 saw the lowest mortgage rates in 65 years, 2013 and early 2014 have not been far off the mark.

In a plot worthy of a James Bond villain, there has been a decided effort in Washington to make the mortgage market less competitive, to assure that the lending system as we know it is  completely gutted and thus to artificially raise mortgage rates.


By replacing Fannie Mae and Freddie Mac with new firms created by the private sector — but backed with government guarantees. Without Fannie and Freddie costs to borrowers would rise, creating less housing demand but raising huge profits for replacement companies.

A year or two ago the end of Fannie and Freddie seemed like a done deal, but in a sudden reversal, it looks like the two giant mortgage buyers will remain in business for the foreseeable future.

Here’s what’s happening — and why:

Fannie Mae and Freddie Mac
Fannie and Freddie buy conforming loans from local lenders. These loans are bundled together and re-sold to investors worldwide. Such securities are then insured and guaranteed by Fannie and Freddie in exchange for guarantee fees (g-fees) — fees worth tens of billions of dollars annually.

So who should get the fees?

Until 2008, it was Fannie Mae and Freddie Mac who got the money, as well as their shareholders. However, with the nationalization of the two giant secondary lenders the picture is no longer so clear. For instance, in 2012 Congress increased the g-fees charged by Fannie Mae and Freddie Mac, not to improve their bottom line or lower mortgage rates, but to fund a temporary payroll tax reduction. In effect, Fannie and Freddie became cash cows to be milked by Congress.

The big battle is whether Fannie and Freddie should exist at all. There are several plans floating around Washington to replace the two big GSE with private firms, big companies created on Wall Street.

Not usually mentioned is that such plans to “privatize” the secondary market are unnecessary. There are already private firms that buy mortgages and then sell securities to investors. For instance, according to conservative financial writer James K Glassman, private companies controlled 67 percent of the secondary market in 2006 but only 14 percent in 2012.

Why did private-sector companies lose so much market share? It was these companies that securitized toxic and subprime mortgages, the loans most likely to fail and the financing at the heart of the mortgage meltdown.

What makes the DC “private sector” proposals different from the private companies long been active in the secondary market is that the new firms would be backed with federal guarantees, just like Fannie and Freddie. Taxpayers would implicitly be on the hook for any losses while all profits would go to investors. In other words, the new private companies would be exactly the same as Fannie and Freddie before the mortgage meltdown. Only the names on the dividend checks would change.

The government’s position in this matter for the past few years could not be more clear: The Federal Housing  Finance Agency — the bureaucracy that now runs Fannie and Freddie — actually produced a report which lays out the whole plan.

How do we know? Just look at the title: “FHFA’s Initiative to Reduce the Enterprises’ Dominant Position in the Housing Finance System by Raising Gradually Their Guarantee Fees.”

The idea is not to create private companies that through better products or lower costs would gain market share, but instead to purposely hobble Fannie and Freddie with higher costs so they can no longer compete effectively.

The plan to undermine Fannie and Freddie has been in high gear but is now facing resistance. Arguably, it may even be dead.

Net Worth Sweep
What happened to stop one of the biggest lobbying efforts in Washington?

Three things:

First, Fannie and Freddie are hugely profitable — and the profits are now collected by the government and used to hold down the deficit. Fannie has so far paid $114 billion to the federal government while Freddie has chipped in $71.3 billion. The two companies will easily repay the $188 billion advanced by the Treasury.

Payments to the federal government from Fannie and Freddie are not considered “income,” instead in the magical thinking of government finance they are defined as “negative outlays” that “reduce” spending and thus the deficit.

“Much of the drop in spending” for December 2013, said the Congressional Budget Office, “occurred because payments from the government-sponsored enterprises Fannie Mae and Freddie Mac to the Treasury were $34 billion more than they were last year.”

Second, unlike Citigroup, General Motors, Chrysler or AIG, federal claims against Fannie and Freddie will not end with the repayment of advances plus interest. In one of the most unusual financial strategies ever seen, last summer the government unilaterally declared that it was entitled to a “net worth sweep” from the two companies, meaning that it would take all profits and income from Fannie and Freddie.

If the government takes all income it means no cash is available to pay dividends to other shareholders or rebuild capital reserves. The government now faces multiple suits as a result of the “net worth sweep” policy because of claims that it’s violating the “taking” clause of the Fifth Amendment by not offering “just” compensation to shareholders.

No one knows how the courts will  rule on such claims, but prospects for the federal government are fairly grim. In the 1996 Winstar case, shareholders of illegally-seized savings-and-loan associations won $30 billion in compensation for the loss of their property. The claims from Fannie and Freddie shareholders could be substantially larger.

Third, given the flood of money generated by Fannie and Freddie, maybe their premeditated and artificial collapse is not such a good policy. Not only would the government lose dividend payments, it would also have new liabilities with their private-sector  replacements.

In addition — and not to be overlooked — with an end to Fannie and Freddie borrowers would face higher financing costs. Mark Zandi, the chief economist at Moody’s Analytics, told the Associated Press that privatization of the secondary market would increase the cost of a typical $200,000 mortgage by $75 to $135 a month — that’s $900 to $1,620 per year — with no additional benefit to borrowers.

You can see the impact of recent federal policies by looking at conventional and jumbo mortgage rates. In an historic reversal, jumbo loans are now cheaper than conventional mortgages because g-fees have pushed up the cost of conventional loans. This happens because jumbo financing is not purchased by Fannie Mae and Freddie Mac, thus such loans do not include g-fees.

The re-thinking of government policies was dramatically shown when still-another increase in the g-fee was announced in December and stopped in January. Interestingly, the increase was the last major act of outgoing FHFA Director Ed DeMarco — and the first for incoming Director Mel Watt.

Article taken from, written by Peter Miller, Contributor

Equal Housing Lender - larger

Mortgage Life Insurance

Life Insurance is a way to protect your family in the event of an untimely death with future financial support.  One way to protect your family’s future is to purchase Mortgage Life Insurance.  It is a type of insurance that is designed to protect a family’s home in the event that the borrower passes away.  If a policy is in place while the borrower/mortgagor passes away, the outstanding balance of the mortgage will be paid by the policy.

This type of policy is not the same as a traditional life insurance policy.  A traditional life insurance policy pays a death benefit to the surviving beneficiaries when the named insured passes away.  The Mortgage Life Insurance policy only pays out if the policy is in place while the mortgage itself is still outstanding.

There are two types of Mortgage Life Insurance policies that are typically offered.  The first being decreasing term insurance and the second being level term insurance.

  • Decreasing Term Insurance:  A type of life insurance where the death benefit on the policy decreases over the term of the policy.  This amount typically matches the mortgage loan term.  The premiums are fixed throughout the life of the policy even though the death benefit decreases each year.  The premiums are usually lower then a Level Term policy.

Example: A married couple with three children has a $250,000 mortgage for 30 years; you should get a 30-year term life insurance policy in the amount of two hundred and fifty thousand dollars which names your spouse as the beneficiary. In case of your death, your spouse can pay off the mortgage, and your family does not lose the home.

  • Level Term Insurance:  A type of life insurance where the death benefit on the policy stays the same or level for the life of the policy.  The starting amount typically will coincide with the mortgage balance and unchanged throughout.  The premiums are usually higher then a Decreasing Term policy and stay the same throughout the life of the policy.

Example:  You are married and have purchased a new home with a mortgage of $150,000 for 20 years; you should get a 20-year term life insurance policy in the amount of one hundred and fifty thousand dollars which names your spouse as the beneficiary.  In the case of your death, your spouse can pay off the mortgage, your family does not lose the home and there may be some money left over for the beneficiary.

Submitted By: Nick Hage, Assistant Manager/Agent for Citizens David Hirth Agency

Investment and Insurance products:

  • Are Not Insured by the FDIC or any other federal government agency
  • Are Not deposits of or guaranteed by a Bank or any Bank Affiliate
  • May lose value

Be Prepared To Buy A New Home

Whether you are a first time home buyer or are looking to move to a different home, beware that we are in a different environment than we were 2-3 years ago.

Key items you should know before purchasing a home:

1) Know your own credit: You may obtain a free copy of your own credit report annually from  It is important that you have credit and that the credit you have is clean. You should get copies of your credit report a few months before you start house hunting.  Make sure all the facts are correct and fix any problems you may discover.

2) Have some savings or equity that you can use towards a new purchase: You will need money for the down payment, closing costs, and the first year homeowner’s insurance. You also want to have a reserve fund in the bank after your new purchase.  As a homeowner, you never know what you may need to repair.

3) Meet with your banker and be pre-approved: Meet with someone that you know will have your best interest in mind.  They will go through your credit, look at your current payments and determine what you can afford for a house.  A good rule of thumb is to compare your current house or rent payment to your new proposed payment.  Do not try to buy more house than you can afford since you will have these payments for a longtime.  Rely on your banker to lay out product options for you and then together you can determine which loan is right for you.

4) Plan for your future: When you become a homeowner, you are responsible for all the maintenance, yard care, property taxes and homeowners insurance.  All of these items should be factored in as an expense in addition to your monthly principal and interest payments.

Purchasing a new home will be one of the most important purchases of your life.  Work with someone that you know and trust to provide you with a good experience.

By: Maria Anderson, Asst. Vice President

Equal Housing Lender - larger

The Truth About Refinancing

Mortgage rates are low but does that mean refinancing is right for you?  Everyone has different goals or situations in their life.  One size doesn’t fit all when discussing mortgage refinancing.

A few things to think about when considering refinancing:

1)     Are you looking for additional monthly cash flow?

2)     Do you want to shorten the term of the loan and save interest expense?

3)     Should you refinance the existing mortgage and pull additional equity out of you home for various reasons?

4)     Will you be moving out of your current home in the next 3-5 years?

5)     What are your personal financial goals?  Age of children, retirement, etc.?

We’ll ask these questions so that we can give you the best advice and options.

If you are shopping to refinance your mortgage:

1)     Beware of the full cost of refinancing your mortgage.  The rate is only a part of the cost.  It is very important that you also know what your total closing costs will be.  It is a “package deal”.  You may be quoted a low rate only to find out that the closing costs are very high.  Review the closing costs and understand what they are.

2)     Is it important to you to be able to stop in and talk directly to your mortgage lender or are you comfortable with contacting your lender via an 800 number for questions or service?  This is the difference between a Service Retained and Service Released mortgage loan.

To summarize:  Be comfortable with your mortgage lender.  Trust that person to do the best job for you and to put your best interest first!

At Citizens, we are available to answer any questions that you may have.  Our goal is to make sure that our clients have the right mortgage!

Shirley Laraway, Vice President

Equal Housing Lender - larger

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