Everyone makes money when the house go up in price that is given. The bank makes money with fees ofr the mortgage loans.
The builder makes money for selling the house.
The Real estate agents make money on commission.
The Title company makes money for smooth transactions.
etc. etc...
How Fannie and Freddie makes their money is by interest rate spreads. Here how it works: Banks can only loan as much as 10X their deposits. If there is a million in the bank at the EOD, They can loan up to 10 Million. (If you want to own a business, BANKS is a real good one). Lets say the bank made 50 home loans worth 10 million dollars, (meaning they maxed it out) they made money on origination fees and points for interest buy downs. Since they maxed out, the banks cannot loan anymore unless they get more deposits from their customers. So what does the bank do... Sell the loans to Fannie and or Freddie. This way the bank free up their funds (10 Million dollar) and they can repeat the same process over and over again. The banks can continue to service those loans for a small fee, usually about 25 basis points. Fannie gets all the interest on the mortgage originated by the bank, say 4.25%. Where did Fannie get the 10 Million to pay the bank? They also borrowed that from the US Government, US Treasury. This is how fannie makes their money. US Treasury loans them real cheap say 2%. The spread is 2% profit to fannie. Now Fannie can also borrow directly from the public by issuing BONDS. Since Fannie is back by the US government and have a Triple AAA rating, ( meaning LOW RISK ) they can pay lower interest to investors. Fannie can still make money from the spread between the traditional mortgage rate and the low rates they pay the fannie bond holders due to safety.
Now let me pause here because that was the past.
TODAY, The US Treasury is charging FNMA 10% interest on the 170 Billion dollar rescue loan to continue operation. The feds keep printing money to keep the rates artificially low.
Since Fannie and Freddie owns 80% of the entire mortgage loans in the US, the losses is incredible.
I really dont think people here understand how huge the losses are. Fannie if allowed to continue operation will no longer have the priviledge of borrowing money cheap because of their credit rating. so how are they going to operate without the US government support. It is impossible. But without Fannie and Freddie, home ownership will definitely decline. 3% down and zero down will be the thing of the past. No investors will buy fannie and freddie 3% or zero down. It allows owners to walk away too easy.
Did you know that Real Estate agents are recommending homeowners to walkaway on their upside down property because a new law allows them to buy again in 1 year for shortsales and 2 years for foreclosure. These kinds of stupid laws that gets us in trouble all the time.
Im done. ALL MY OPINION only.
GLTA.
