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Answers to your Fannie, Freddie takeover questions

WASHINGTON – Sept. 12, 2008 – The federal government’s dramatic takeover of mortgage finance companies Fannie Mae and Freddie Mac raises many questions for the public at large as home prices continue to fall and the U.S. economy remains weak.

Here are answers to questions Associated Press readers submitted about the bailout, which was announced Sunday by Treasury Secretary Henry Paulson and James Lockhart, director of the Federal Housing Finance Agency.

Q. Is the government going to help out any of the responsible people who did not buy a home when they could not afford it?

A. No. Despite criticism that the government’s aid rewards people who made bad financial decisions, lawmakers and government officials want to prevent the housing market from falling further. They are working in several ways to assist troubled borrowers, but acknowledge that not everyone will be helped. Consumer advocates, meanwhile, say the assistance is essential because many borrowers were duped into loans they didn’t understand.

Q. Three top Fannie Mae executives – Stephen Swad, Robert Levin and Enrico Dallavecchia - recently left the company or retired. What are they receiving as compensation?

A: Exit packages for departing Fannie Mae and Freddie Mac executives is already a hot-button issue in Washington. Former Fannie CEO Daniel Mudd is due to receive up to $8.4 million in compensation, while Richard Syron, Freddie Mac’s former chief executive is due to receive up to $15.5 million. However, Syron is likely to forfeit a $8.8 million cash grant, a person familiar with his thinking said.

Levin, the company’s former chief business officer, was entitled to $1.6 million in cash upon termination, according to a regulatory filing. Stock awards to Levin and Swad – the former chief financial officer – are now worth little. Information on Dallavecchia’s exit package was not disclosed.

Q. Is the U.S. government supporting Fannie Mae and Freddie Mac’s mortgage securities?

A. The government is not explicitly backing mortgage securities issued by the companies, which consist of thousands of home loans packaged into investments. The Treasury Department plans to make an initial purchase of $5 billion of those securities later this month in an effort to make home loans more available to consumers and lower interest rates.

Q. How will the takeover of Fannie Mae affect the sale of my house?

A. Fannie and Freddie are continuing their normal operations and will buy even more loans through 2010. Current real estate transactions shouldn’t be affected. In fact, mortgage interest rates are falling, and that may get more buyers off the fence.

Q. How does the Freddie and Fannie bailout compare to the S&L crisis bailout in the early 1990s?

A. The exact cost will depend on how far U.S. home prices fall. But some economists believe it could be more costly than the savings and loan crisis, which took six years and $125 billion in taxpayer money to resolve. That’s nearly $200 billion in today’s dollars.

Q. Fannie and Freddie used to have fairly strict loan standards. Were the losses magnified by Freddie and Fannie lowering their underwriting standards and accepting subprime loans?

A. Fannie Mae and Freddie Mac might have avoided a government seizure had they stuck with traditional 30-year, fixed-rate mortgages and not backed so-called called “liar loans” – mortgages approved without proof of borrowers’ income or assets.

While Fannie and Freddie didn’t make subprime loans, they did buy securities tied to those mortgages. The companies say they felt pressure to compete against Wall Street giants that were backing extremely risky loans that are now falling into foreclosure in droves.

Q. My home loan payment is $2,908 before taxes. My wife and I have a gross monthly income of $7,700. I also receive a commission that varies from month to month. Do you know if we will qualify for the assistance?

A. The Fannie and Freddie takeover is designed to stabilize the companies and aid the broad mortgage market, rather than assist individual borrowers.

However, you may qualify for a refinance loan under the Federal Housing Administration’s “FHASecure” loan program, depending on your credit score and other factors. Visit http://www.fha.gov or call 1-800-CALL-FHA.

Q. If Fannie Mae and Freddie Mac actually lowered mortgage rates as happened after the $200 billion takeover, would it have been necessary?

A. Fannie Mae and Freddie Mac don’t set interest rates, and don’t lend directly to consumers. They buy mortgages from lenders like Bank of America and Wachovia, and package them into securities, which are sold to investors.

Fannie and Freddie, however, do charge fees for their services, and those can be passed onto borrowers in the form of higher interest rates.

The level of investor demand for debt sold by Fannie and Freddie pushes their borrowing costs higher or lower, which in turn affects mortgage interest rates.

Q. What will be the impact on Fannie and Freddie’s shareholders?

A. Common shareholders have already been nearly wiped out as shares of both companies have been trading below $1 this week. The company’s preferred shares, which pay a fixed dividend and have priority over common stock when it comes to dividends and bankruptcy liquidation, are also virtually worthless.

Q: I’m in trouble with my home loan, and my mortgage broker says I don’t make enough money to refinance. What should I do?

A: Call 1-888-995-HOPE, a 24-7 counseling service run by the Homeownership Preservation Foundation.
August 2, 2008

New law gives first-time buyers $7,500 tax credit

WASHINGTON – Aug. 1, 2008 – Tell first-time homebuyers it’s time to commit: A provision of the recently-passed federal housing recovery bill gives first-time buyers an interest-free loan of up to $7,500 in the form of an income tax credit.

The credit equals 10 percent of a home’s cost up to $7,500, and applies to any single-family residence (including condos and co-ops) to be used as a buyer’s principal residence.

First-time homebuyers, defined as those who have not owned a home for at least three years, will claim the tax credit the first year they file federal taxes and receive the money as a reduction of their federal tax liability. The money must be repaid at the rate of 6.67 percent of the total credit each year for 15 years, essentially making it an interest-free loan. If a home is sold before the 15-year pay-off, the balance of the credit is recaptured at resale.

The credit was included in the new law as a way to entice first-time buyers to get off the fence and commit to a purchase.

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January 30, 2008

Florida Voters Pass Amendment 1 to Save Our Homes for Immediate Property Tax Relief

US Fed cuts interest rate amid global stock sell-off and recession fears