Home loans: New rules by Federal Agency

The federal government has taken over two mortgage providing giants firms. These firms, Fannie Mae and Freddie Mac, are the largest provider of funds for housing market in US. They purchase mortgages and convert them into securities. They are also known for buying mortgage based securities.  These firms are very controversial and the most recent of which included their portfolio worth $1.7 trillion.  They were a big support to the government during the mortgage crisis.  These firms were primarily responsible for the market being afloat.  The companies are on the receiving end these days with a rise in delinquencies. There has been a request for $35 billion in assistance from the treasury since the fourth quarter results of Fannie and Freddie portray losses of huge percentage. This help is in addition to the $13.8 billion that has already been extended to the firms in September.

New rules are going to be introduced by the federal regulators of these firms in the wake of the tumbling housing market.  Federal Housing Finance Agency would lay down new rules according to which the company should have sufficient capital to safeguard their securities at the same time carrying on activities. Mortgage based securities and home loans which are the main constituent of the companies’ portfolio should be backed by capital.

The twelve regional Federal home Loan Banks will have new rules governing their capital. These banks provide funding to more than eight thousand small banks all over the nation. This lending would have to be reduced according to new rules. The fourteen government sponsored enterprises would be looked after and made safe since they contribute largely to mortgage markets.

While the new rules would make these mentioned institutions safe there are questions that still linger over the safety of Fannie and Freddie firms. The home loan banks with eight thousand member banks are now being a cause of concern since these banks have guarantee from the federal government and are its major source of home loans, mortgages and development of community based credit. These banks have a history dating back to the Great Depression when they were established.  Their working method includes giving small advances at low cost to member banks in exchange for mortgage based securities.  All over the nation banks have relied on this source of capital.

The present housing scenario is that mortgage based securities have seen a decline in their values at the same time local banks are in credit crunch due to nonpayment of bills and loan defaults. Dividends of these banks have been cut back. Many banks have announced their shortage of capital.  These banks are suffering and the Federal Agency’s new rule which decreases their lending capacities would be a blessing in disguise since many experts believe that the root cause for all these problems have stemmed from the over lending that has been happening over the years. The rules that would be announced and become applicable form the coming weeks would be steps taken to ensure credibility of the housing market.