VA loans have proven to be resilient since the start of the recession in 2008. When mortgages issued under other loan programs came to a virtual halt, VA loans seemed to continue progressing at a steady pace.  Factors leading up to the 2008 mortgage crisis had little effect on the VA loan guaranty program.   

 

Just before Thanksgiving 2008, the Federal Government announced its $700 billion plan to bail out Wall Street.  Some were quick to blame the Fannie Mae and Freddie Mac loan programs.  Understanding what part these loan programs played in the big picture can help explain why veterans’ mortgages appear bullet proof to one of the biggest mortgage impacts in history.

 

Fannie Mae was created in 1938 under Franklin Delano Roosevelt’s New Deal.  In the wake of the Great Depression, the national housing market collapsed and private investors were reluctant to invest in home loans.  Fannie Mae provided local banks with federal money to finance home mortgages in an attempt to raise the levels of home ownership and the availability of affordable housing, as well as jump start the depressed economy.    

 

For thirty years, Fannie Mae operated like a national savings and loan, allowing local banks to charge low interest rates on mortgages to benefit home buyers.  This lead to the development of the secondary mortgage market.  Within this secondary market, companies such as Fannie Mae are able to borrow money from foreign investors at low interest rates due to the financial backing that they receive from the U.S. Government.  The ability to borrow at low rates allows Fannie Mae to provide fixed interest rate mortgages with low down payments to their borrowers. 

 

Until 1968, Fannie Mae held a veritable monopoly over the secondary mortgage market.  Under Lyndon B. Johnson, and due to economic urgencies created by the Vietnam War, Fannie Mae was privatized in order to “delete” the item from the national budget.  It was then that Fannie Mae began running the agency as a government sponsored enterprise (GSE), generating profits for stock holders and reaping the benefits of tax and oversight exemptions as well as implied government endorsement.   

 

To eliminate further monopolization of the market, a second GSE known as Freddie Mac was created in 1970.  Thereafter, Fannie Mae and Freddie Mac controlled about 90 percent of the nation’s secondary mortgage market.  They both made their profits from the difference between the interest rates charged to homeowners and the lower rates that foreign lenders charged the agencies. 

 

During the last three decades of their existence, Fannie Mae and Freddie Mac’s combination of private enterprises and public backing yielded them tremendous financial growth.  Their assets totaled 45 percent more than that of the nation’s largest bank. But, with unprecedented assets came greater liabilities equal to 46 percent of the national debt.  It was the combination of rapid growth and over leveraging, in part, that delivered the critical wound to the government-sponsored mortgage behemoths in the final quarter of 2008.

 

Incidentally, Fannie Mae and Freddie Mac were the only two Fortune 500 companies not required to inform the public of any financial trouble.  Yet, in the event of a financial collapse within either or both of these companies, U.S. taxpayers would potentially be liable for the hundreds of billions of dollars in outstanding debts.

 

Certainly, part of the responsibility can be put on individual borrowers for stretching themselves too far financially and living beyond their means.  But, it’s this government-sponsored debt, and who held it, that completes the equation for the 2008 crisis experienced by the agencies.  In 2003, $654.8 billion of this government-sponsored debt was held by foreign investors.  With each passing year, the amount of this debt held by foreigners rose.  By the first quarter of 2008, foreign investors held $1.54 trillion in Fannie Mae and Freddie Mac debt – 21.4 percent of which was held by official foreign authorities.  These official foreign investors were perhaps the most badly burned by the U.S. financial sector – and the U.S. stood to lose big in foreign relationships if something wasn’t done.   

 

With foreign investors much more cautious about gobbling up American debt, the bailout liability of Fannie Mae and Freddie Mac will be sold and marketed in an effort to heal the U.S. housing market and repair our damaged international financial standing.

 

Since the end of December 2008, bailout funds from the Fed have been pouring into the lending system, and banks are lending again.  For non-VA loans, this means borrowers can again get money to buy homes. The general belief that mortgages are again on the rise is a good thing for both non-VA loans and VA loans.

 

Understanding how VA loans work can help explain why VA loans faired so well in the mortgage crisis.  A portion of VA loans are guaranteed by the Federal Government, which means that the government will cover some of the lender’s losses in case of default.  This is why many lenders deem VA loans stable in an otherwise volatile mortgage world. 

 

At the beginning of December 2008, it was the general belief that mortgages of any kind were impossible to get. Many lenders had put such stringent qualification requirements on mortgages that most borrowers had to have 20% down and excellent credit to qualify. Because most borrowers don’t apply with perfect credit or 20% down, the natural result was an unofficial “hold” on lending. 

 

VA loans have their own set of qualifying standards; therefore, the VA loan program resisted the effects from this temporary hold on mortgages.  Zero down and 100% refinancing are standard for VA loans, and lenders typically able to obtain the same low rate they would normally award a non-VA borrower with excellent credit and 20% down.  VA-eligible borrowers can get a competitive rate whether their credit score is 605 or 810.  Separate qualifying standards, unique loan benefits and a strong federal guaranty have proved to be an effective combination in withstanding the recent mortgage crisis.