Saturday, March 22, 2014

What's Going To Happen To Freddie And Fannie? What Does It Mean For Mortgage Rates?

Yesterday RealtyTrac published a good article talking about the debate currently going on in Washington D.C. about Freddie Mac and Fannie Mae. There are several moving parts in this whole ordeal that investors should be aware of. Rather than trying to regurgitate those for you here, we suggest you read the article from RealtyTrac.

It's mind boggling how much money the government is pulling in from Frannie and Freddie now. However, at the same time it feels like we've been down this road before. Mortgage rates can't stay this low forever, can they? Everything is rosy now, but what happens if this new real estate bubble that seems to be forming pops? As soon as mortgage rates start to go back to a normal range, what's going to happen to the housing market?

Housing values are being inflated thanks to historically low interest rates. When that 3.75% 30 year fix mortgage goes to 5%, all the sudden instead of being able to afford a $300,000 house, that same homebuyer will only be able to afford a $260,000 home. The housing market simply won't be able sustain current values once this rate increase happens. Then, just like we saw before, the snow ball effect will come into play and things will get exponentially worse.

If the government shuts down Freddie and Fannie, you can be that rates are going to increase a lot faster than they would otherwise. At the same time, though, this current model is not sustainable either, at some point it is going to crash, and the government is going to be on the hook. I suppose at least this time around the government gets to participate in the upside. Too bad they don't do a a better job of managing the profits.

1 comment:

Marlk Adams said...

Well not all mortgage wholesalers are going to disappear, but a huge void will need to be filled. FHA and VA will still be around and have in recent years become more streamline and easier to navigate. Private banks will not doubt re-emerge to fill the gap in some sectors of the market. Another source that may play a key role is private lending from private self directed IRAs. By forming a self directed LLC a person can manage the funds, but still be arms length so that the IRA features and protected even though you are investing in real estate with your IRA or making loans with you IRA. It is something to consider for hard to place loans and mortgages on non traditional properties. has more information.