Fannie, Freddie and Ginnie may sound like the title of the newest coming of age beach read, but that couldn’t be further from what they actually are. Nevertheless, this trio may also be going through a coming of age moment which will have a heavy impact on home finance.
Most people have heard of Fannie Mae and Freddie Mac, which are government-sponsored but not government guaranteed entities that package mortgage loans into mortgage-backed bonds. Ten years ago, after the financial crisis, the federal government took them over into a conservatorship and bailed them out with taxpayer money.
At that time, they were thinly capitalized because they purchased subprime loans with little down payment from buyers who were also not vetted properly. As we all now know, this created the famous housing bubble that burst with millions of foreclosures around the country. Well, Fannie and Freddie are at it again creating risk by accepting high-risk, low down payment loans. For years even before the housing bubble some members in Congress and the House Financial Service Committee have been attempting to reduce the scope of Fannie and Freddie and protect the American taxpayer.
There has been talk in Congress of developing a private capital program in conjunction with Ginnie Mae. Ginnie Mae is a government-owned corporation that guarantees bonds backed by home mortgages that have been guaranteed by a government agency, mainly the Federal Housing Administration and the Veterans Administration.
FHA loans have been around a long time, designed to help borrowers who couldn’t get conventional home loans because they had low credit scores or limited resources. However, unlike the subprime loans from 10 years ago these borrowers as well as the properties they purchased were better scrutinized. FHA inspected the properties being financed through them and were sometimes a seller’s and realtor’s nightmare because of their thorough procedures. VA loans are also created through Ginnie Mae as a veteran’s benefit. Currently, only about 10 percent of mortgage-backed loans are originated through Ginnie Mae.
The program that is being floated is to work with private mortgage credit guarantors using the Ginnie Mae system creating a private capital buffer for the loan. Presumably, this would protect taxpayers from some of the risk encountered when Fannie Mae and Freddie Mac were taken over by the government and bailed out by taxpayers. The objective is to reduce the size of Fannie and Freddie and put some of the risk onto private capital.
Will this work? No one really knows and any threat to Fannie and Freddie will encounter enormous pushback from government officials not to mention Fannie and Freddie employees, who have an obvious financial benefit to keep expanding these agencies.
Not only are our primary mortgage lenders going through a generational change, but our newest generation of adults may also be going through a generational change. Gen Z children, who are now college age or about to graduate, appear to be a lot more serious about finance than their parents and even their hippie grandparents.
Having lived through the financial crisis and experiencing the scars left on their families, they are approaching adulthood with a more conservative bent. According to The Wall Street Journal, they are doing a lot less partying and consider being well-off financially an important part of their lives.
Who knew that kids raised on video games, youtube and texting would turn into a generation we haven’t seen since the Greatest Generation. Works for me and for the future of real estate.
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