A Short Lesson on Fed Lenders

A Short Lesson on Fed Lenders, Or Why Most Homeowners Actually Get A Mortgage in 2015

The Federal Reserve raised interest rates 1/4 percent, the first time it’s raised interest rates since 2006. Basically, interest rates have been in the neighborhood of 0% for nearly 10 years.

So, today I’m wondering how many US homeowners enjoying low interest rates on their mortgages realize that the federal government is the real reason they have a mortgage on their house?

MarketWatch.com posted the following statistics in October 2015:
“…the federal government is shouldering more than $5 trillion in mortgage risk out of a residential mortgage market of about $11 trillion, according to the Federal Reserve. That’s close to 50%, and up from 40% in 2007. By comparison, only 7% of residential loans were federally guaranteed in 1981…”
So, half the mortgages in the US are not held by private lenders, even though consumers went to their banks, credit unions and other private lenders to obtain mortgage money. After making a loan, these retail lenders have an asset they can sell to other lenders, and the value of each asset includes the anticipated interest on the loan, not just the repayment of the original principal.

The secondary mortgage market has been a big business in the US, and historically, there have been many financial institutions and investors standing in line to purchase these assets at a discount, anticipating the profit to be made by collecting all the monthly mortgage payments over the lifetime of the loan.

For example, groups of home loans are often put together into packages and sold to investors as securities. These investors include insurance companies, pension funds, bond funds, hedge funds and investment banks buying mortgage-backed assets in order to make a profit. They are willing to take a risk to make their profit, but only if they have confident expectation they’ll come out ahead.
According to the statistics I quoted earlier, there are far fewer institutional lenders standing in line to buy retail mortgage loans now, so the federal government has had to buy more of them instead. Without the federal government-sponsored entities we know as Fannie Mae and Freddie Mac taking on the risk of home loans in the secondary mortgage market many home sales would not happen today.

Investopedia.com states, “In the summer of 2007, the market for all mortgages except those guaranteed by Fannie Mae and Freddie Mac came to a complete standstill, emphasizing the importance of the roles played by the two companies.”

Obviously, we’ve become even more dependent on them since 2007. That’s a lot of power invested (literally) in two, separate government-sponsored entities.

Does the quarter of one percent increase in interest rates signal a healthy change in the mortgage market? I guess we’ll just wait and see.