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The US mortgage lending crisis: Understanding the roles of Fannie, Freddie and FHA

[Aug 18, 2010.]


When you buy a home and take out a mortgage, what happens to your mortgage loan? It doesn't stay with the mortgage lender or bank that originated your mortgage. Instead, your mortgage will likely be sold to Fannie Mae or Freddie Mac, and may also be "securitized."

This means that your mortgage, along with a group of other mortgage loans, serves as collateral for investments called "mortgage backed securities." If this sounds complicated, it is. the The complexity of the US mortgage lending industry is currently under scrutiny as the governent and housing finance industry work toward fixing what's broken.

FHA: Making homeownership affordable by insuring home mortgage loans

The Federal Housing Administration (FHA) is an agency of the US Department of Housing and Urban Development. (HUD) FHA helps moderate income individuals and families achieve home ownership by insuring mortgage loans made by its network of approved mortgage lenders. If an FHA mortgage is foreclosed, or the mortgage lender incurs a loss through approving a short sale, FHA reimburses the lender for its losses. The FHA insurance program is self supporting and currently does not cost taxpayers.

The FHA charges borrowers of FHA loans mortgage insurance premiums that are paid into the fund used for paying lender claims. FHA has taken a big hit caused by the foreclosure crisis that started in 2007; its fund for paying mortgage lender claims has fallen below the legally required level, and the agency has recently raised mortgage insurance premiums charged to homeowners to recoup its losses.

Fannie and Freddie: Providing funding for America's mortgage lenders

Fannie Mae and Freddie Mac were not entirely federal agencies, but were known as government sponsored enterprises (GSEs). They were chartered by the government to buy mortgage loans from lenders, which makes funds available for lenders to make more mortgage loans. A conflict of interest arose when the GSEs issued stock publicly traded on the New York Stock Exchange. (NYSE).

This created a conflict between producing profits and meeting the original charter of these agencies for making low cost mortgage loans available. As Fannie and Freddie became the largest purchasers of mortgage loans, their stock prices rose, and the need for pleasing shareholders overshadowed their original charter for providing affordable housing. The GSEs' business decisions contributed to the housing crisis and their rescue by the federal government.

Mortgage lending in the future: more government oversight?

As lawmakers work to revamp the housing industry, it's possible that the US government will assume a larger role; it may convert Fannie and Freddie to government agencies under HUD, and it could insure more mortgage loans through FHA. Whatever happens, the US mortgage lending industry needs major work for regaining its health.


About Author:

Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.

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