Mortgage headlines have been dominated recently by the recently low mortgage rates that have been available for much of the year, but there's another story which is beginning to emerge, one of success by Fannie Mae and Freddie Mac.
Why is this important to vets and veteran families?
To make the VA loan system work we need investors who purchase mortgages. In most cases a VA mortgage is originated by a lender who then re-sells the mortgage in the secondary market. The "secondary market" is not really a place, it's an electronic exchange where mortgage loans are bought and sold, packaged together and then used to create mortgage-backed securities.
Freddie Mac and Fannie Mae are the biggest players in the secondary market because of the vast number of loans they purchase, package and insure in exchange for investor cash. Without Fannie Mae and Freddie mortgage rates would be much higher and financing and refinancing would be far more difficult, thus all borrowers benefit when Fannie Mae and Freddie Mac are doing well.
The two companies — which were taken over by the government in 2008 — have begun to generate profits and pay back money advanced by Uncle Sam.
In the second quarter Fannie Mae had a $5.1 billion profit and paid a $2.9 billion dividend to the US Treasury.
Freddie Mac also did very well. In the second quarter it took in $3 billion and is paying $1.8 billion in dividends to the Treasury.
“We saw a confluence of positive factors in the second quarter, including improved home prices, improvement in REO sales execution, and a continued decline in our single-family serious delinquency rate. These factors had a positive effect on our financial performance,” said Susan McFarland, Fannie Mae's executive vice president and chief financial officer. “Most notably, an improvement in home prices during the quarter resulted in a reduction in our loss reserves, which resulted in credit-related income for the quarter."
In other words, as home values go up, Fannie Mae and Freddie Mac have less reason to worry about losses. As a result, they don't have to set aside as much money for reserves. If they set aside less money for reserves, they have bigger profits.
With Fannie Mae and Freddie Mac on firmer financial ground it's time to ask whether the two giant companies should once again be privatized. This could be done by selling the government's interest in the two companies on Wall Street. If the results seen in the second quarter were to continue for a year, the two companies would have profits of more than $32 billion -- enough to justify stock sales which could raise the $190 billion or so owed to Uncle Sam, and maybe even more.