Posts Tagged ‘cash infusion’

Homeowners Rush to Refinance While Interest Rates Are Low

Wednesday, February 18th, 2009

What recession?

A recent conversation with a friend revealed the unexpected nugget that at least one segment of the credit industry is alive and extremely well. The friend’s mortgage broker daughter is taking a leave of absence from law school to concentrate her energies on processing all the refinance applications coming her way – a torrent so great that she is currently earning commissions well into the five-figure range every week.

The downside is that this window of opportunity does absolutely nothing for people who desperately need help keeping their homes. Something needs to be done for them, too.

new_american_gothicThis rush to refinance is thanks to the Federal Reserve’s commitment to buy large blocks of mortgage-backed securities and other debt from Fannie Mae and Freddie Mac in its efforts to restart the mortgage market. Because of the Fed’s cash infusion, the benchmark 30-year fixed-rate loan fell to below five percent recently, even as low as 4.89 percent. Mortgage rates haven’t been at levels like this since the 1950s. GMAC Mortgage reports that refinance applications soared more than 75 percent in January when compared with November.

Not surprisingly, the homeowners qualifying for refinance loans aren’t struggling; they are able to pay their mortgages and see a way to save some money. According to Scott Stern, chief executive of Lenders One, “The refinance boom is mostly impacting the people who need help the least. These are people who already have conforming fixed-rate loans or government financing.”

Fannie, Freddie and the American Taxpayer

Thursday, September 11th, 2008

As the United States government commits a bare minimum of $100 billion of taxpayer money to bail out Fannie Mae and Freddie Mac, the final reckoning depends on how effectively Washington runs the mortgage powerhouses.

According to the Christian Science Monitor, with the sheer magnitude of Fannie and Freddie – with $5 trillion in home loans on their combined books – the taxpayers’ burden is likely to add up to billions of dollars very quickly. 00037darling-let-s-get-deeply-into-debt-postersThe worst-case scenario could see the tab rise as high as the $125 billion it cost the taxpayers in the early 1990s to bail out failed savings-and-loan institutions. The rosiest scenarios hypothesize that the short-term cash infusion might be recouped with little or no net cost to the taxpayers.

Part of the reason that Fannie and Freddie are under conservatorship is that foreign central banks and investors have been divesting themselves of American mortgage debt, because they are nervous about falling prices, weak credit and the weak dollar. Since foreign ownership represents $1.4 trillion, it is a sizable piece of the puzzle.

The bottom line is that every U.S. taxpayer is now tied directly to the troubled housing market. And the stakes here are significantly higher than the government’s $30 billion bailout of Bear Stearns. The ultimate cost to taxpayers is tied directly to the depth of the housing slump. If housing prices continue to fall and foreclosures rise, the losses to Fannie and Freddie will increase. The opposite scenario would be far better news for taxpayers.

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs), because Congress chartered them to create a stable mortgage market. They have functioned well by guaranteeing home loans or buying them outright. Even with steep declines in the number of sales and prices, investors have continued to fund home loans with a Fannie or Freddie seal of approval; this has kept mortgages relatively available and affordable.

The Treasury Department had no alternative but to intervene, become an equity investor in Fannie and Freddie, and a buyer of their mortgage-backed bonds. Their objective is to restore consumer confidence in the credit markets, reduce the cost of mortgages, and help the housing market recover.