There are all types of servicers of mortgages (the company to whom the borrower sends their monthly payment) and investors in mortgages (often insurance companies, pension funds, and money managers). But in the current lending environment, JMAC’s brokers know that approximately 90% of loans are directly linked to Fannie Mae, Freddie Mac, the Federal Housing Administration, or the Veteran’s Administration. And of those groups, the lion’s share is Fannie or Freddie (conventional conforming) loans.
Our brokers ask, “How are Freddie and Fannie doing?” In the last few weeks both announced their earnings for the 4th quarter of 2013, as well as for 2013. They’re earnings are very good, as well they should be. Delinquency and default numbers have fallen. Loans being originated now are the cleanest, most thoroughly underwritten and appraised, heavily documented loans in history.
But the great profit numbers may not continue. Some of the profits came from one-time tax reversals as the companies reversed huge write-downs they were forced to take in 2008. More came from releasing loan-loss reserves and one-time legal settlements with Wall Street banks or lenders. And just like homeowners out there, their financial outlook has benefited significantly from strong home-price appreciation and low interest rates, both of which may moderate in future periods.
JMAC’s brokers know that Fannie and Freddie are still charging fees that are higher than in previous years. And these fees, along with higher rates, stricter guidelines, compliance costs, consolidation in the industry, will reduce the ability for some borrowers to obtain financing for either purchases or refis. And this is what the press, Congress, and special interest groups are watching, and asking, “Will credit be denied to credit-worthy borrowers, especially self-employed borrowers?”
In addition to concerns for individual borrowers, Congress seems determined to decide how to overhaul Fannie and Freddie. The administration has made clear it doesn’t support returning Fannie and Freddie to their former duopoly status as ‘government-sponsored’ entities that are neither fully private nor fully public. But current politicians seem hesitant to take on any challenges during an election year, and there are other, more pressing issues that Congress is having trouble coming to a consensus on, not only is any substantive change proposal unlikely this year, but everyone is in agreement that it will take years of work to implement.