This is a great article by a gentleman that really knows his mortgage stuff.  It was published before the conforming loan limits were raised but I thought that there was some great information here.  Reading between the lines the S&L crisis and our current mortgage meltdown might have been avoided if Fannie Mae has been a bit more conservative.  But then what do I know.  Pamala Meador


Fannie  Who?

If you live around Washington D.C. and feel a desperate need for some chocolate, you’ll
probably head to the nearest Fannie Mae candy shop.  In parts of the East Coast, Fannie Mae
is their version of See’s candy.

In the rest of the country, Fannie Mae is perhaps the most important government sponsored
agency that no one knows anything about.

So what the heck is it, what do they do, and why does it matter?

First, it doesn’t really affect you if you’re going to rent the rest of your life.

But if you're a homeowner, someone who wants to be a homeowner, or a realtor, it matters a
great deal.

Let’s take a look at its history.

Fannie Mae was originally chartered during the New Deal.  It was meant to be a source of
liquidity to the banks, prepared to buy mortgages so that the banks could re-lend the money. 
In fact, it did very little of this for decades, and it only became a big business in the early
1980’s.

If you’re over sixty, you might recall how it used to be when you were looking for a
mortgage. You would walk into an S&L, and as amazing as it sounds today, they would
often tell you they were “all loaned up.”  This meant that all their deposits were lent out, and,
as they’d tell you, you could come back in a few days and see if they had some new money to
lend. 

It could be because some loans paid off, or perhaps because they took in some deposits.

As crazy as it sounds, it was this way till the late 70’s and early 80’s when Fannie Mae
started getting much more active.

By buying loans, Fannie Mae freed up money for the banks & S&Ls lend again.

It provided liquidity, which is really fancy way of saying that it supported housing values.  If
you think about it, it makes total sense that housing values would decline if there is no
mortgage money around.

As California housing prices climbed in the last 30 years, Fannie Mae became less and less
relevant in California.

Why?

The answer is that Fannie Mae sets a limit each year on the size of mortgages they can buy. 
Right now, it’s a max of $417,000 per loan.   While that might be enough in rural North
Dakota, it's just not enough in most parts of California.

I know what you’re thinking. You're thinking a big So What?

It actually matters a great deal. 

If you get a Fannie Mae loan today, that is, one that’s $417,000 or less, your rate is
significantly lower than if you get a so-called jumbo loan over that amount.

Go over $417,000 – even by just on e dollar - and your rate will jump almost a full point.

In round numbers, the monthly payment will jump about 10% once you go over this
threshold.’

One of the more exciting things coming out of Washington, aside from Fannie Mae chocolate,
is the possibility that Fannie Mae will raise its loan limits.  Congress is getting close to raising
it a whopping 75% to $730,000.

Just imagine. With higher Fannie Mae loan limits, monthly payments will be lower and that
will make it infinitely easier to qualify borrowers.

Does it matter?

You bet it does!

If it goes through, Realtors should see values stabilize, sales increase, and borrowers get easier
to qualify.

It matters a lot!

Rick Soukoulis
Chairman and CEO
Intero Mortgage