by Dale Rogers

Bernanke, in the recent past, had been urging in a passive way for the two heavy weights to lighten their portfolios. Now, it is more pointed with a strong message to Fannie Mae and Freddie Mac to focus more on affordable housing and less risky loans. The Option ARMs where massive foreclosures are occurring are stressing the portfolio. Many families have sought bankruptcy protection to get a handle on their run away finances. Recently, Freddie Mac indicated they would wean the purchase of specific subprime loans with challenged credit.

There was always a push to cut the umbilical cord with the government so that Fannie Mae and Freddie Mac could operate more independently. However, with the recent elections and Congressional change that looks like a no go and rather, there may be more governmental scrutiny and over sight with the two forever connected at the hip to government control. The two 1,000 pound gorillas have the power to wreck havoc through out the financial markets with their super sensitive “curb feelers” are in full receptor mode of operation. Recently, it was reported by one of the top lenders in the country that some borrowers with high scores are falling behind on their payments indicating further stress in the mortgage arena. This news sent further ripples through the markets.

The original intent of Fannie Mae and Freddie Mac was to create a secondary market where loans could be sold in order to free up capital for the mortgage loan originator to make even more loans. Many Savings and Loans in the 60’s would bump into a financial pinch where they had no money to lend. This was called disintermediation as applied to savings and loans. Since that time, the word has taken on several different meanings. Former savers discovered other avenues of investment such as mutual funds and such. In the old days, many mortgage loans were assumable. There were many occasions where savings and loans would suspend any lending until more money came in by way of savings or someone paid their loan off. Creation of the secondary market with quasi-governmental control remedied this situation and then the secondary market became liquid. This newfound liquidity allowed for ready construction and development monies to move forward as well as just regular buy and sell financed real estate transactions. If the money institutions wanted to slow things down with some sort of perceived market risk, they would simply raise the rates and things would tighten all reflecting long-term government Bond yields. Thus with this mechanism of the secondary market liquidity and control were brought to the market place.

Now how does this all play out on Main Street USA? Well it looks like with Subprime lending requirements tightening up, and now Fannie Mae and Freddie Mac other avenues will need to be pursued. Any borrower with some credit challenges will need to get their financial house in order to qualify under the tighter loan rules and requirements. Tightened loan underwriting restrictions programs featuring Option ARMs with negative amortization, stated wage earners, No Doc, No Ratio, stated self-employed are all getting a very close look. With accelerating foreclosure rates with many emanating from the subprime and Option ARMs foreclosures, things are a changing. Collections and write-offs may need resolution to qualify for loans. Previously, many subprime loan guidelines would allow those negative credit items could remain open. Until the tide turns the other way, things will be tightening up.