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How Does Fannie Mae Work?

In 1938, Fannie Mae was established by the US Government to promote the growth of home ownership by providing a secondary mortgage market. What is a secondary mortgage market? Well, the secondary mortgage market exists in the buying and selling of a mortgage from one lender to another. The bank, or Mortgage Company that provided you with your loan, can turn around and seek to sell your mortgage to a company such as Fannie Mae. This frees up their cash to make another mortgage loan. And the cycle of growth is expanded and sustained in this manner. The idea and concept worked, and today, Fannie Mae has helped millions of Americans achieve the dream of home ownership. Until recently, Fannie Mae was a part of the US Government, and was overseen by the Housing and Urban Development branch of that government. Now, however, Fannie Mae is a privately held, stock ownership company that promotes the growth of the housing industry by making it possible for many low-to-middle income Americans to own homes. Investors just like you and I can purchase stock in the Fannie Mae Corporation, and not only increase our won wealth, but also help to fund the home ownership possibilities for a new generation of Americans.
In 1968, just thirty years after her government commissioned birth, Fannie Mae became a private company operating with private capital. She had outgrown her need for federal funding and supervision. That does not mean, however, that the government does not still closely work with the Fannie Mae Corporation. It does. The housing industry has continued to grow, and currently the entire mortgage market is experiencing phenomenal success. Fannie Mae’s focus, however, is still on the low to middle-income American.
Fannie Mae deals only in the secondary mortgage market, this way Fannie Mae Corporation can ensure that money for mortgages is available throughout the 50 states and that as many homeowners as possible can take advantage of home ownership.

How does Fannie Mae continue to fund the mortgages that she buys? Through the issuance of mortgage backed securities. These securities known as MBS are issued to investors. When Fannie Mae issues the MBS, she is guaranteeing the investors a return on their investment, and at the same time, providing a source of funding for issuing further mortgages. This provides the nation’s lenders with a steady stream of cash to continue to make mortgages available to the consumer.
How does all this relate to the home of your dreams? Well, stop just a moment to connect all the dots. Fannie Mae buys mortgages from your local lender. The lender receives the proceeds from that purchase, and can then offer a new mortgage to you. It’s a steady and continual circle of growth. Why? Well, Fannie Mae isn’t the only lender in the secondary market. Insurance companies, pension funds, securities dealers, and other financial institutions buy mortgages on the secondary market. Who invests in these insurance companies, pension funds and securities dealers? Where do they get their money? From taxpayers just like you. Mortgage holders just like you. Now can you see how Fannie Mae and other mortgage lenders in the secondary market, work to foster home ownership and community growth, all in one process?
The primary focus for Fannie Mae, operating under a government directive, is to provide the maximum amount of help to lenders in making mortgage loans to the low, to middle, to moderate income families across America. Fannie Mae is also involved in a nationwide effort to join with lenders and community partners to create even more home ownership possibilities.
Through this partnering, and the existence of FHA backed mortgage loans, the Fannie Mae Corporation and your local lender can offer a greater variety of loan products, and reach a much broader client base. This increases once again, the homeownership possibility for many, more Americans. Thanks to the expanding mortgage product line, the increase in real estate values, and the efforts of Fannie Mae, more Americans own their own home than ever before. Where will the future take Fannie Mae, and corporations like her? I think the Fannie Mae Corporation will continue to foster growth and the realization of the American Dream for many successful years to come.

Interest Only: In Your Best Interest?

Prior to the depression of the 1920s, there was a mortgage loan product used by many of the American people, known as the interest only loan. Why did this long disappear? And why has it suddenly reappeared? Let’s take a moment to answer each question, and hopefully provide some food for thought.
During the 1920s and into the early 30s, many of the citizenry of this country chose to live above their means. They chose the interest only loan because it allowed them to purchase a larger home for less money. What happened when the stock market crashed and jobs were scarce, and there was no income? Many of these people were left without homes; as they had chosen to simply pay the interest on their mortgage there was no equity built into their homeownership. When no equity builds, and the income ceases, the bank forecloses and residents or forced from their homes.
During the Great Depression this happened to many homeowners. It was at this juncture that many lending institutions chose to remove this loan product from their offered products as it was simply too risky. But with the creation of the many mortgage products offered today, the interest only loan has made a return. And what a return!
Today the interest only loan market segment comprises some 30% of the entire loan market; a development of only four years. Prior to 2001 days only loan market was a 3% segment of the entire market; the exponential growth we’ve experienced has set new records not only for the mortgage market, but for many financial markets in general. Add to this tremendous growth the also tremendous growth of the housing industry, and you have a very delicate situation.
But is the interest only loan good for the average consumer? Not very. There are individuals who truly benefit from an interest only loan, but they fall into a very small category. The greatest benefactors of an interest only loan would be investment individuals and young professional individuals who do not intend to retain their home for more than five years. How many of the actual mortgage applicants follow into this category? Less than 5%. So how do we have only 5% of the population actually qualify for the interest only loan, and an interest only loan market of 30%?
We have these conflicting figures because not everyone that purchases in interest only loan truly benefits from an interest only loan. The mortgage lender is not concerned with the benefit of the product to the purchaser. The mortgage lender is interested in the profitability of the product he or she has sold. And interest-only loan is a truly profitable product. In fact, the entire payment is a profit to the lending institution. Not one penny of the payment applies to principal for a specified term. Interest only payments, generally comprise only five to seven years of the entire term of the loan. After the initial five to seven year interest only term, the consumer begins to pay greater payments that apply to both principal and interest. As you can say this is truly not in the interest of the consumer, as most consumers do not begin to see a rise in income as quickly as they begin to see a rise in mortgage payment.
Investors who have a trying staff of financial advisers and lending specialists truly understand how to use an interest only loan in order to turn a profit, but there is where an investor is not a homeowner. For homeowner has no interest in profitability, they are concerned with residency stability. They cannot afford to lose their home; an investor can afford to lose an investment. As you can see, there may have been merit and validity to the decision to remove interest only loans from their product offering during the 20s and 30s; it’s quite possible today, that we have lost sight of the devastation and destruction witnessed during the Great Depression. Let’s just hope the bubble doesn’t burst. Interest only loans are encouraging borrowers to live at the limits of their means, and I don’t think that’s good for the borrower, the economy or the housing market. What happens to the homeowner, should the bubble burst?

Mortgage Interest and Your Tax Liability

As you begin your search for the perfect home, and you research your mortgage loan options, the tax consequences of a mortgage loan with mortgage interest doesn’t even cross the minds of most consumers. But as you decide which product you need, or think you need, the tax repercussions and benefits should play a role, even if it’s a small one, in the final decision.
For many consumers, the first thought that’s given to their tax return, and tax liability, comes from the mortgage lender. Quite often, mortgages are touted as being one of the best venues for reducing your tax liability at the end of the year. Yes, your mortgage interest payments will reduce your tax liability, but is that your ultimate goal? Is that why you’re looking at mortgage packages? No. Your ultimate goal in choosing a mortgage is to pay for your home.
Every situation in this case, and this case would apply to the average consumer shopping for a mortgage loan, is probably not going to get that much benefit from the tax deduction that comes from their mortgage interest payments. The average consumer should first look at their monthly payment and choose a mortgage based on affordability, not tax liability.
The smart consumer will not allow the flashy ads displayed by many mortgage lenders to influence their mortgage loan decision. The smart consumer will examine the interest level, the term of the mortgage loan, the affordability of the monthly payment, and base their decision upon their ability to pay in relation to the mortgage that achieves their primary purpose: the payout of the loan.
You and I rarely consider the impact of any financial decision on itemized deduction statement; however many of those decisions do affect itemized deductions. Are itemized deductions a major portion of our tax liability? No. Do they contribute to a reduction in tax liability? Yes. The relativity of the contribution when contrasted to the required time in examining the actual benefit we derive from the itemized deduction calculations warrants the point mute. It's just not worth the effort.
If you happen to be in your mid-40s and you are purchasing your first home, I would suggest that you consult a financial adviser prior to making a mortgage decision; however most individuals in their mid-40s would already realize the benefit of a financial adviser. A young couple purchasing their first home would truly benefit from the interest deduction, not to the extent however off more than $40-$50 of the bottom-line for their tax liability. As you age, and your way to earning power increases, the benefit of the itemized deduction decreases. Does the average person understand how tax is configured? No. The only person who can truly enlighten a consumer would be a tax professional, and many average individuals would spend more money in the determination of the benefit than they would reap.
The new guy on the mortgage loan law, known as the interest only mortgage loan will bring the greatest benefit to the consumer. The interest-only loan in the amount of interest you can deduct on your tax return are one and the same, but does the benefit of the mortgage interest deduction outweigh the added expense of an additional five years on the mortgage loan?

What about the mortgage loan refinance? Any equity you remove from your home in the form of cash that can be used to pay down or pay all high interest credit card accounts will transfer a nondeductible expense to your deductible expenses. However you should remember the trade-off you now owe more against your home, and you have used your equity reserves. Was the deduction worth the trade? Many times the answer is no. For many consumers, paying off high-interest credit card debt only increases the probability of additional credit card charges. In other words, not only have use your equity, you've returned to high-interest debt.

Prior to a final decision of your mortgage along product, take a moment to review your tax situation. Each situation is unique. The lower your income, the greater the benefit, but rarely is the benefit worth the cost. Behold, the Tax Man, cometh.

Real Estate and Mortgage Loans: The Circle of Growth

In case you haven’t noticed the mortgage market and the real estate market have been blazing a trail into the record books. Never before has there been such explosive, sustained growth of these two markets. The key factor here is that one seems to feed off the other. Is this a good thing, or are the two markets headed for a collapse?
You have analysts that will argue for either side. But, you need to have a better understanding of how this process works, and what elements have come together to allow this kind of growth, before you can accept or disprove either argument. What has happened to spur this kind of growth? Well, there are several key factors that managed to come together at precisely the right time, some of them attributable to natural disaster that has generated a booming market. The first contributor was the falling interest rate that has leveled out around 6 – 7%; the second great contributor has been the increase in mortgage loan options. There are mortgage products out there to fit every type of buyer. The third contributor, (and this one is purely from nature) was the horrific hurricane seasons of the past couple of years, including the season we had this year.
How have all these elements come together to generate growth? Here’s exactly how: lower interest rates meant cheaper monthly payments, refinancing options were open, and people could afford to buy bigger homes for less. Add to that mix a more varied loan market, and you have an increase in buying, selling, and building. If you also throw in the fact that hurricanes destroyed massive quantities of homes along the coast, and most will rebuild, you have a burgeoning real estate and housing growth market.
We have also managed to create an environment very conducive to investment, construction, and resort development. Now, if you factor in a booming market for investors, you have a prime situation for increases in real estate value, increases in construction, and increases in mortgage loans.
How does the average citizen ready to buy or build a home interpret all this information? Well, it creates a wonderful situation for the homeowner looking to sell a home, simply because the value of the home should show a tremendous increase over the purchase value, especially if you’ve owned the home for more than 10 years. However, if you’re buying or building, you’re not going to like the situation. Why? Because home prices are up, thanks to the rising real estate prices, and so are is the price of building materials, needed to build a new home. We can attribute much of this to high gas prices and hurricanes. The good news, in all this, is the low interest rates. You can still borrow at an extremely affordable interest rate.
For the consumer shopping the market, you need to really educate yourself about the rising costs of real estate, the local values in your community, and what mortgage products would most benefit you, when you consider your individual objectives. If you’re like most, you aren’t buying your home for an investment, and you aren’t buying with the intent to sell in a few short years. In the market of today, it would be a wise choice to meet with a financial advisor; someone that has a background in finance, and can help you to clearly define your objects, and choose a mortgage that will reflect those objectives.
Many of the individuals, who are the doomsayers, seem to think that the market can’t sustain this type of growth. That is has occurred too quickly, and like the bubble of the stock market, will burst, leaving many homeowners and mortgage lenders “holding the bag” so to speak. But, you also have many of the intellectuals that say the real estate market was due a burst of growth; that it is normal, healthy, and we should have no trouble sustaining this type of growth. Whatever the end result, right now, the real estate market and the mortgage market are hot items; if you own real estate, you’ve hit the jackpot. If you’re looking to buy, get ready to pay.

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Retirement and the Mortgage Loan

There is an untapped reserve of cash in our homes; it’s the equity we’ve built into our homes over the life of the mortgage, or simply in owning our own home. If you’re looking for a great financial tool, learning to use the equity in your home to its fullest extent is something we Americans aren’t very good at accomplishing. Fear of a loss is the number one reason we don’t utilize our equity asset. But, if you will take the time to investigate many of the investment options available to us, the risk is minimal, and the return is great. Especially now during this period of extremely low interest rates, your home’s cash equity could be earning you a return of 18-20% in certain investment funds. Even if you borrow money in order to cash out the equity, you’re making money. The interest you pay is substantially less than the interest you’re earning.
Why are we so reluctant to take out a second line of credit, or increase our mortgage balance through refinancing? Many of today’s homeowners reaching retirement age do not fully understand all their investment options, nor do they understand how investments like growth funds work. They are very reluctant to try anything that is beyond the sure bet of a certificate of deposit. In so doing, they are missing a tremendous opportunity to earn a greater return on their money, and let their money work for them.
Take a look at your 401k, where are your investments? Are they earning 5-8-10%? Unless you’re ready to retire, your 401k should earn at least 6-8% on your investment. Your home is earning you nothing on your investment, at least, not in the sense that the money must stay in the home in order for the home to increase in value. Quite honestly, your home will appreciate in value if you do nothing but maintenance work and live in it. Your equity you have in your home, can earn you up to a 15% return, while you still are fairly safe with your principal investment.
Speaking of 401k investments, are you investing the maximum each year in your 401k? If you’re self-employed, are you making use of the SEP retirement options that reduce your tax liability? If you’re not, you should really consider the equity in your home as an investment option for adding to your 401k, or establishing an SEP that will allow you to invest your money in profitable and fairly safe global and growth funds. There are still many excellent opportunities in the stock market. There are segments of the market that are experiencing phenomenal and stable growth. The overseas markets, the domestic real estate markets, and the energy markets are growing, and are expected to see sustained growth. Put your money to work for you, especially if you are several years away from retirement.
Another retirement option that involves a mortgage loan is the reverse mortgage. This however, is not a way to build retirement savings; it is a way to simply access the equity you’ve built in your home, so that your monthly income levels are adequate to sustain your most vital needs. Food, clothing, heat, and medicines are a must as you reach or near retirement age. Many times, the elderly are not as prepared financially as they anticipated that they would be. How can they supplement their monthly incomes? The reverse mortgage is the answer to many older citizens’ financial needs. The reverse mortgage allows a person to withdraw a monthly sum against the equity they’ve built into their home. The interest payments are deferred until death, and the homeowner doesn’t have to worry about making a monthly payment, or borrowing money. They are able to use the money they’ve already put into their home, just when they need it most.
If you are past the age of 40, and you haven’t taken the time to consult with a financial analyst, I would recommend that you seek out one that you can trust and that you are comfortable in discussing your financial affairs with, and begin to look at your retirement options, your retirement needs, and your ability to meet those needs, based on your current income and savings. What you may find is that you aren’t near as prepared for retirement as you thought. The monthly income needed will probably greatly exceed your anticipations. But, if you own your home, you may have just prepared more than you think!

Reverse Mortgage Loans

If you were to ask the average consumer to define the reverse mortgage concept, you would find very few able to do so. Many consumers, especially those who aren’t up on their mortgage products and their availability will never have heard of a reverse mortgage, much less able to explain the concept. But it may just be one of the best financial planning tools available to many seniors and those reaching retirement age.
As many individuals reach retirement age, their fixed incomes simply aren’t adequate. They aren’t receiving enough through social security or a pension fund to take care of the rising costs of living and the medical attention many older citizens must have. So what is the solution? Many of these retirement age citizens have children. Why can’t their children supplement their incomes, or simply take care of their elder care needs? The simple fact is that many of their children aren’t in a position to care for their elderly parents. Their incomes aren’t enough to have money left over, and if both spouses work, there is no one to take care of an aging parent.
It is at this juncture that many people have begun to turn to the reverse mortgage in seeking the increase in monthly income that is so desperately needed. The reverse mortgage offers older citizens a way to benefit from the equity in their home, because the reverse mortgage turns that equity into a monthly income. Quite frankly, unless you live with your parents, or you intend to move into your parents home when your parents pass, you aren’t going to retain the home; statistics attest to the fact that the vast majority of children sell their parents home, once their parents are no longer in need. Why not cash in on that equity when your parents are alive, and need the monthly income?
The popularity of the reverse mortgage has been steadily increasing, and many reverse mortgage companies expect 2005 to be a banner year. As the idea begins to catch, and spread among the elderly, there are more mortgage companies that offer a reverse mortgage product. The key here is that most of these elderly did plan for retirement; they did try to make the necessary adjustments so that there monthly incomes would be enough to see them through their retirement years. Thanks, however, to the rising cost of medical care, prescription medicine, and heating fuel, many older citizens have found that their planned retirement income each month is simply not enough.
There are those reaching the retirement years, for which the reverse mortgage is not an option, simply because they have no equity in their homes, or they don’t own a home; but for the remaining seniors, it’s an option that I would exercise, especially if I were certain my home would be sold during an estate or inheritance sale. The money that the reverse mortgage generates, can add so much to the few years we have during our retirement in the areas of travel, entertainment, and sheer enjoyment of life.
Since we can never be sure that we’ve properly prepared for retirement, or that some unexpected emergency won’t knock us off our feet, or that we simply do not have enough thanks to the stock market losses of recent years, the reverse mortgage is one of the best ways for older citizens to access the equity in their homes and turn it into ready cash.
We have saved the best part, however for last: any proceeds from the reverse mortgage are tax-exempt proceeds. In other words, you will not have to pay tax on the money. There are other, tax-exempt options, but the reverse mortgage remains one of the most conducive to the senior citizens needs, as well as those of their families. The interest payments on a reverse mortgage are deferred until death, therefore, seniors do not have to be concerned with making interest payments or tax payments on the proceeds.
If you’re not familiar with the reverse mortgage, and you think you might benefit, or that your parents might benefit, take a moment to seek the advice of a financial officer, and then quite possibly your attorney. Never make any decision before you fully understand what the consequences of your decision might be, legal or otherwise.