The home loan mortgage correction has led the government to reassess the extent of its role in the mortgage market. So far, the government has been proactive in starving off a financial market crisis but would like to resuscitate the financial, housing real estate, and mortgage markets to pre-2005 levels. The revival of mortgage loan markets to peak levels involves the active involvement of Freddie Mac and Fannie Mae.
Fannie Mae and Freddie Mac have been directed through legislative action and through the Office of Federal Housing Enterprise Oversight (OFHEO) to implement measures to secure the mortgage market. The new actions affect new mortgages and mortgage refinancing.
The OFHEO has reached an agreement with Fannie and Freddie in which the mandatory cash cushion of $20 billion that the two companies maintain will be reduced by a third. The cash funds are meant to mitigate risk during a financial crisis. The approximately 13 billion dollars freed up from this move will be used to purchase mortgages of struggling homeowners enabling them to perform mortgage refinancing to affordable home loans with lower mortgage rates.
Also, Fannie Mae and Freddie Mac will be encouraged to get extra capital. The additional capital could be raised through cuts in dividends or special sales of stock. Collectively, the two government backed companies are expected to raise up to $200 billion in new mortgage funding.
The new mortgage plan will soon be made public. As the home loan conundrum grows, so has the government’s involvement in resolving the matter. As such, policy makers have turned to the combined companies to increase participation in the mortgage backed securities markets.
In recent weeks, the government had enacted a $168 billion economic stimulus package that included a temporary rise in the cap of mortgages that Fannie and Freddie can purchase. Before the new cap took effect, the two companies weren’t allowed to purchase jumbo loans, financing that was at minimum $417,000. Now the cap has been elevated to $729, 750, making higher-end home loans eligible for purchase.
Jumbo loans are accompanied by higher interest rates, due to the fact that mortgage lenders are unable to sell the loans to the two companies. Now with the minimum for jumbo loans increasing, onetime homeowners ineligible for lower interest rates are now able to get the same rates as most Americans. The new higher minimums are only a temporary measure, once the government is satisfied that its goal of helping homeowners and home buyers with their mortgages has been met, the minimum rate will be reset back to the original $417,000.