Joseph Metzler MMS UMB

Important News - Fannie and Freddie Takeover by the Fed. What it means to YOU

As you no doubt know, the federal government yesterday took significant action with regard to Fannie Mae and Freddie Mac.

The basic facts are below. The Treasury indicates that they are acting primarily out of concern that Fannie and Freddie's ability to fulfill their mission has deteriorated, particularly with regard to the capacity of their capital to absorb further losses while supporting new business activity. As a result, Fannie and Freddie's regulator is taking over all of the duties and powers of the management and board of the companies. The primary goal is to provide stronger backing for the holders of MBS, senior debt and subordinated debt. To strengthen the mortgage market, the companies will be allowed to grow their guarantee MBS books without limits and continue to purchase replacement securities for their portfolios, about $20 billion per month without capital constraints.

The view is that:

-- In the short term the move, whether it was really necessary or not, will provide stability to the mortgage market by easing capital concerns at Fannie and Freddie

--Through 2010, the Dept of Treasury plans to grow Fannie and Freddies portfolios; i.e. the intent appears to be to expand Fannie and Freddie business, at least during the housing downturn

--Fannie and Freddie may actually loosen up credit standards to help stimulate the mortgage market

--Concerns about stable foreign debt investment in the GSEs was likely the primary driver for the fed move.

Longer term:

It seems to me that the Treasury plan basically reverts Fannie and Freddie to a facility for federally backed mortgage debt. The Treasury theory appears to be to employ F/F as a counter cyclical model

-- when times are tough they will ratchet up the companies; when the environment is more "normal" they will ratchet back and let the private market carry the ball. Regarding the future structure of Fannie/Freddie:

Next year Congress and the new administration and the interest groups will be consumed with the question of what the post conservator GSEs look like.

Here are the main facts regarding the federal action:

· Conservatorship Fannie Mae and Freddie Mac are placed into conservatorship immediately. (No change in status for the Federal Home Loan Banks.)

· GSE Portfolios To promote market stability, the GSEs will be allowed to increase their MBS portfolios through the end of 2009. However, starting in 2010 the portfolios will gradually be reduced at a rate of 10% per year through run-off, eventually stabilizing at a much lower size.

· Treasury Preferred Stock Agreement Treasury and the Federal Housing Finance Agency (FHFA) have established a Preferred Stock Purchase Agreement to ensure that each company maintains positive net worth. These agreements are intended to provide security to GSE debt holders and MBS investors. In exchange, Treasury receives a senior preferred equity share and warrants to protect taxpayers - common and preferred shareholders will bear any potential losses ahead of the government's senior preferred shares.

· Secured Lending Credit Facility Treasury has established a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. This facility is intended to serve as an "ultimate liquidity backstop." This facility will expire on December 31, 2009.

· Treasury Program to Buy GSE MBS Later this month, Treasury will be initiating a temporary program to purchase Fannie Mae and Freddie Mac MBS. Such purchases will be made as appropriate. The program will expire on December 31, 2009.

Other highlights:

· On Monday, the GSEs are expected to resume normal business operations.

· The U.S. government assumes control over the Board and management.

· Current Fannie Mae and Freddie Mac CEOs are being replaced, but will stay on through a transition period.

· Herb Allison will assume CEO duties at Fannie Mae, and David Moffett will assume CEO duties at Freddie Mac.

· There will be limited initial management actions - they will work with the current management team.

· There will be no dividends paid on preferred or common stock.

· All lobbying/political activity by the GSEs will cease.

FHA's NEW Upfront and Monthly Mortgage Insurance Guidelines

To add more confusion to the already confusing market, HUD (U.S. Department of Housing and Urban Development) is AGAIN changing their upfront and monthly mortgage insurance premium guidelines for all NEW FHA case numbers assigned commencing OCTOBER 1, 2008 to be consistent with the Housing and Economic Recovery Act of 2008.

FHA guidelines had been unchanged for years. But, back on July 14, 2008, FHA had introduced new risk based premiums for both the upfront MIP and the monthly mortgage insurance on FHA loans. Those guidelines rewarded better qualified buyers with lower premiums, while charging riskier buyers with higher premiums. To avoid any confusion, I will not list those here, as they will be gone shortly.

EFFECTIVE 10/1/2008

UPFRONT PREMIUMS:
1) FHA will charge upfront MIP (mortgage insurance premium) of 1.75% of the loan amount on all purchase transactions
2) Streamline refinances (all types) = 1.50% of the loan amount
3) FHASecure (delinquent mortgagors) = 3.00% of the loan amount

MONTHLY PREMIUMS:
30-year loans, less than 95% LTV = .50%
30-year loans, greater than 95% LTV = .55%
15-year loans, less than 90% LTV = None
15-year loans, greater than 90% LTV = .25%
FHA secure, all loan terms, less than 95% LTV = .50%
FHASecure, all loan terms, greater than 95% LTV = .55%

There are many other changes being made to not only FHA loans, but just about every single loan option and program in the market. Therefore our advice to you is to be smart, ask questions, and get good answers by only working with experienced dedicated professionals

More than likely, this is one of the largest and most important financial transactions most people will ever make. They might do this only four or five times in their entire life, but we do this every single day. It's their home and their future. It's our profession and our passion. We're ready to work for your best interest.

We provide FHA loans in Minnesota (MN), Wisconsin (WI), and Florida (FL) only. Check us out online at www.JoeMetzler.com.

(c) 2008 Metzler Enterprises, www.JoeMetzler.com