Fannie Mae and Freddie Mac are federal agencies with a mandate to support the mortgage markets in the U.S. Now that those markets are in turmoil, some members of Congress want them to support the refinance of subprime and jumbo loans to help relieve borrowers.

Senator Charles Schumer has authored a bill that would earmark nearly $73 billion for mortgage refinancing to assist homeowners wanting to switch out of adjustable loans before they reset to higher interest rates. He proposed the measure as a way to avoid the impending disaster that many economists predict, as trillions of dollars worth of mortgages convert to higher rates over the next two years. While the subprime market accounts for only a small percentage of America's loans, it still affects tens of thousands of homeowners who may default on their loans without such aid.

Jumbo headaches


At the other end of the mortgage spectrum, those who need jumbo loans-unconventional mortgages necessary for amounts exceeding $417,000-are also getting pinched by a sudden lack of funds. Investors who finance these large, high-risk loans have suddenly fled from the scene, leaving many potential buyers and refinancers with nowhere to go for a mortgage.

Congress keeping tight watch


Fannie Mae and Freddie Mac have some logistical problems of their own. In recent years, they've come under investigation for alleged sloppy accounting practices. As a result, Congress has been reluctant to let them expand their operations. Until the agencies earn a clean bill of health from government auditors, they continue to face an uphill battle in their quest for higher loan limits, and permission to take over a portion of the ever-increasing jumbo loan market. Meanwhile, the two agencies are abiding by the newer and more restrictive lending rules that have recently been created by legislators and regulatory agencies in an attempt to curb abuses within the mortgage industry. While the two entities support some subprime loans, they're only accepting those that meet the new and more prudent underwriting guidelines.

Consumers struggle to refinance mortgages


What does all this mean for borrowers who are already in the trenches, fending off rising rates while scrambling for cover that seems to be rapidly disappearing from the landscape? This remains to be seen. Nobody can predict how soon relief will be available with certainty, because the situation is in flux. Those who are waiting for loan approval, for example, may get encouraging news, or may face disappointment when their loans can't be funded. But lawmakers like Senator Schumer are working to devise creative solutions to a complicated and treacherous problem. If this new bill passes, billions of dollars in fresh funds will be pumped into the pipeline.

While waiting for calmer waters, borrowers can enhance their chances of success by showing up with lots of documentation, a clean credit report and strong credit score, and a healthy loan-to-value ratio. Lenders and investors are eager to make loans, as long as they can control the risks. Borrowers are hoping that they don't drown before these waters calm down.

Published on September 30, 2007