Many might remember the television ads that played frequently several years ago. George Zimmer, from Men’s Wearhouse, would offer men’s clothing for sale and brag about the quality and low prices of his merchandise.
In fact, he believed it so much that he ended his commercials with the phrase, “I guarantee it!” This endorsement was catchy and probably contributed substantially to the growth of the company.
As it relates to mortgages, guarantees are extremely important. This is especially true of the guarantees provided by Fannie Mae and Freddie Mac for the purchase of conforming mortgages from lenders.
In addition, this is true of the underlying implicit guarantees provided by the U.S. government to back Fannie Mae and Freddie Mac, which are both U.S. government sponsored enterprises.
During the credit crisis, which took on enormous proportions during 2007, many lenders went out of business and many mortgage programs disappeared. Also, most jumbo mortgages seemed to dry up because they could not be sold on the secondary mortgage markets.
Therefore, most lenders put the bulk of their efforts in marketing conforming mortgages under $417,000 which were guaranteed by Fannie Mae and Freddie Mac. In fact, according to the Office of Federal Housing Enterprise Oversight, “Their market share of total mortgage originations grew from 37.4 percent in 2006 to 75.6 percent by the fourth quarter of 2007.”
It is the guarantee to lenders that caused these conforming mortgages to be marketable.
But, what happens if the guarantors encounter problems?
Well, let’s see. Fannie Mae and Freddie Mac are supervised by the Office of Federal Housing Enterprise Oversight, whose mission is, “To promote housing and a strong national housing finance system by ensuring the safety and soundness of Fannie Mae and Freddie Mac.” Their Web site is: www.ofheo.gov.
On April 15, James B. Lockhart, director of that office, released its annual report to Congress.
The news release said, “The report concludes that both enterprises made very good progress in remediating their operational areas and providing stability and liquidity to the mortgage markets, but they remain ‘a significant supervisory concern’ because of increased mortgage market and credit risk.”
The question is what happens if Fannie Mae and Freddie Mac encounter significant additional financial problems? This is where the implicit guarantee by the U.S. government comes into play.
According to an April 21 article on CNN Money.com entitled “The trillion – dollar mortgage time bomb” it said, “Risks are rising that Fannie Mae and Freddie Mac may need a U.S. government bailout that could cost far more than previous rescues.”
This article is very informative and has quotes from credit rating agency Standard & Poor’s, economists and economic policy analysts. The article closes, “But Jaret Seiberg, financial services analyst for policy research firm Stanford Group, said ‘Fannie and Freddie ultimately should be able to weather the storm though simply because there is no question that the government would bail them out ... What has allowed Fannie and Freddie to continue to operate when the private mortgage-backed security market dried up is their implicit government guarantee.’”
It is reassuring to know that lenders’ conforming mortgages are guaranteed to be purchased by Fannie Mae and Freddie Mac. It is also comforting to know that Fannie Mae and Freddie Mac, in turn, are backed by the implicit guarantee of the U.S. government, in the event their financial strength erodes significantly.
One thing we can all count on is that during the remainder of this year and into 2009, we can expect there will be continuing twists and turns during the ongoing credit crisis.
Like Zimmer said, “I guarantee it.”
Mike Ferguson is with Windsor Financial Services  in Granite Bay. Visit him at www.windsorFS.com.