Increasing the Mortgage Lending Limits of Fannie and Freddie?

Although the government somewhat backs and regulates both Fannie Mae and Freddie Mac, they operate like typical corporations (they are publicly held). They are very similar to each other in many respects and both play a very important role in the mortgage industry.

Fannie Mae and Freddie Mac set the standards on underwriting that most banks follow and via the web they can instantaneously underwrite loans. The systems are so reliable that banks use the program to decide if they will lend to customers.

Fannie Mae and Freddie Mac take the mortgages they buy from banks in the United States and pool them into similar types by rate or risk category. Those pools are sold as bonds called Mortgage Backed Securities to Wall Street and foreign investors. This way, the investment community backs the risk of lending money on mortgages, which in turn keeps rates low.

By increasing the caps on the investment portfolios of Fannie and Freddie the OFHEO can alleviate some of the "pain" in the mortgage market. Many people who are in sub-prime loans may not need to be there and widening the net can capture more loans or bail out some people who got bamboozled into taking these troublesome loans by refinancing them into stable fixed rate loans.

In addition the OFHEO through Freddie and Fannie can also capture some of the Alt A and a little of the sub prime business by having experienced Loan Officers run the borrowers through the Fannie and Freddie Automated Underwriting (AU) systems and offering some special programs that both organizations offer. "Home Possible" is Freddie Mac's affordable housing product and "My Community" is Fannie Mae's. They are better alternatives to some Sub-Prime and Alt-A loan programs.

Lastly, both agencies will repackage the loans and sell them on the Street with the backing of the government and a long tradition of stable Mortgage Backed Securities.

Long term, this may be a good way to stabilize the marketplace in Mortgage which has driven the economy for so long. Sub-Prime has always been a risky investment but with housing prices flattening, they have become even more of a risk. Also, with some unscrupulous lenders selling to people who are generally unqualified you add a massive layer of default risk.

Fannie's and Freddie's AU is tested, tried and true. It has been used by probably billions of users and it is constantly tweaked based on the data on the loans that default.