Just How Important is Fannie Mae to Housing's Recovery? - If you do a Google search about mortgages, the housing market, or real estate, chances are the articles that come up are going to include information about Fannie Mae. Many Americans know that Fannie Mae is sponsored by the government and helps to regulate the mortgage industry, but not everyone can tell you the specific role that the organization plays in the process.
So what exactly does Fannie Mae do, and – more importantly – how important is it to the housing market's recovery?
First, let's start off with a history lesson. After the Great Depression, President Franklin D. Roosevelt created a series of economic programs, known as the New Deal, in hopes of providing relief, recovery, and reform to the struggling economy. This included the creation of the Federal National Mortgage Association, commonly known as Fannie Mae, in 1938. Fannie Mae was established to provide local banks with federal money to finance home mortgages. With more money available, banks were able to issue more loans, therefore boosting home ownership.
Fannie Mae is also credited with creating the secondary mortgage market. That means they buy several mortgages, group them together, and sell the packaged loans to investors as mortgage-backed securities. This allows lenders to reinvest their assets into more lending, and reduces the industry's reliance on savings and loan associations.
Through all of these efforts, Fannie Mae has helped regulate mortgages, and it has made investing in the housing market less of a risk for investors. In other words, the mortgage industry has relied on Fannie Mae for several decades. But are they still a key player these days?
Their chief economist sure thinks so! But let’s take a look at how everything ties together.
Across the country, new and existing home sales are rising, home prices are increasing, and the number of foreclosures is declining. Just last week, the National Association of Home Builders released their latest housing market data, reporting that 70% of the 361 metro markets that they track are showing signs of recovery. Because of this, consumer confidence is up, and consequently, so is the number of prospective homebuyers who are applying for a mortgage.
As long as consumers want loans, Fannie Mae chief economist David Duncan says the agency will play a key role in the mortgage industry. By selling the low-risk mortgage-backed securities to investors, Fannie Mae increases the number and value of mortgages available to lenders. And with more money to lend, banks are more likely to approve a loan application.
Duncan says Fannie Mae also plays another crucial role in the housing market's recovery that many consumers overlook. “We ask one question that nobody else asks,” Duncan recently told Yahoo.com's Finance Daily Ticker. “Is it a good time to sell a house [because] five out of six people who buy a house have to sell one first. That’s been a steady climb month over month.”
By charting that information, and then passing it along to potential investors, Fannie Mae helps boost investor confidence in the securities they are selling. When an investor is confident that the housing market is improving, they are more likely to buy the mortgage bonds in hopes of making a profit down the road.
So it seems that Fannie Mae's chief economist may be correct in his assumptions that the agency does, in fact, still play a key role in the health of the housing market after all these years!
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