Can Fannie Mae and Freddie MAC run out of cash? If so, how do you get a conforming loan?

Asked by David Hunter, Lake Forest, IL Wed Jul 9, 2008

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Michael Ford, Agent,
Fri Jul 11, 2008
read todays NYTimes...they won't run out of cash but they will certainly be experiencing delays of all types in their operations as they get sorted out. there will be disruptions in their work flow.

disregarding their possible losses for bad loans...they have been engaging in questionable accounting for the last decade and it appears that if they are to survive they will need an act of congress to relieve them of the FASB reporting requirements.

they may be too big to let fail but their distress will ripple through all corners of the economy. . this is a story to watch. their failure would make the subprime mess look like a spit in the ocean.
2 votes
Greg Zaccagni, , Illinois
Thu Jul 10, 2008

Based on your comments I suspect there is quite a bit more to you than your profile reveals. As a broker what I like about this issue is that it brings to light how mortgages are really owned. Direct lenders are more than happy to perpetuate the misconception that they portfolio loans they originate when infact most of them are sold to Fannie & Freddie. Would you agree with this statement?

The term "conforming loan" refers to loan guidelines that conform to the guidelines Fannie & Freddie will buy. The most well know is the maximum loan amout of $417k. As you correctly point out, neither Fannie or Freddie keep these loans. They bundle them other loans having similar characteristics and sell the on wall street as mortgage backed securites/bonds.

International institutional investors like pension fund managers buy these bonds for and rely on their steady stream of income (your mortgage payment) to make their own payments to pension recipients & insurance annuitiy holders.

While a certain percentage of default is factored into these, exceeding this can endanger the buyers ability to meet their own monthly obligations and therefore they typically expect that the issuer (Fannie & Freddie) will buy back non-performing loans.

The issue of late seems to deal with the way Fannie & Freddie account for this potential liability on their financial statements. Apparently their current practice of not showing this risk on their books may not meed Generaly Acceptible Accounting Principle (GAAP) guidelines. Forcing them to put this back on their books could severely damage their financial position.

Here is a link for more information.…
2 votes
John Walin, Agent, Libertyville, IL
Sun Mar 31, 2013
Oh it's Obama's fault...
But wait, this question predates the Bush crash of 2008 and Obama election into office Jan 2009
1 vote
Other/Just L…, , Fleming Fitch Grant, Holly Hill, FL
Fri Jul 11, 2008
Fannie and Freddie could certainly run out of cash... if Uncle Sam were to allow that to happen. The problem they face is two-fold: Stock prices are way down do to foreclosure losses and uncertainty of risk in their loan portfolios. Some analysts think Uncle Sam might have to step in with a cash injection to shore up the balance sheets and bolster the stock price.

They won't run out of cash to purchase loans, however. The stock price and balance sheet shortgage are important, but the key factor for Fannie and Freddie to attract investors for Mortgage Backed Securities (the source of money for Fannie and Freddie to buy loans from banks) is the rate of interest and corresponing yield on the MBSs. A simple solution if investors are jittery is to jack up the yields (and corresponding mortgage interest rates charged by banks to borrowers).

If the problem persists, we'll probably see conforming loan interest rates return to the normal range of 7.5%-9.25% rather than the 5.75%-6.75% we've seen over the past few years.
1 vote
Greg Zaccagni, , Illinois
Mon Jul 14, 2008
Looks like the fed is ready to institute a 3 prong approach to prevent the implosion of Fannie & Freddie. For more info click this link...…
0 votes
Daniel, , Baton Rouge, LA
Wed Jul 9, 2008
biggest threat to real estate right now is wall street oil speculation driving oil and gas to outragious levels
0 votes
Michele Wils…, Agent, Lake Forest, IL
Wed Jul 9, 2008
The Federal Government can't let these agencies stop lending. It would shut down the Real Estate economy completely.
0 votes
The Michael…, Agent, Gurnee, IL
Wed Jul 9, 2008
It is my understanding that Fannie & Freddie package loans and sell bonds backed by those loans. I don't think there is any concern that they'll run out of money.
0 votes
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