The Ripple Effect

The music has stopped a lot lately because of the whole sub-prime credit crisis, and investors aren't willing to buy as many of the Fannie and Freddie mortgage bonds as they used to…if at all. So, Fannie and Freddie aren't making as much money.

If Fannie and Freddie don't have as much money, they can't buy as many mortgages from lenders. Then…the banks are stuck lending only the amount of money that they have on deposit.

Now, because the banks can't lend as much as they used to, they want the money to go only to those whom they are sure can pay them back…so credit standards are tightened.

If fewer loans are made, the ramifications are profound. First, the housing slump will continue at best, or, at worst, become far more serious. Second, fewer people will be able to obtain loans based on the equity in their homes, much of which has dried up across America, which will mean less cash making its way through our economy.

The government has to act quickly and forcefully, as it appears to have done. Let's hope that Washington really does do the right thing by admitting that these two companies have more liabilities than assets and put the regulations in place at Fannie and Freddie that should have been put in place during the Reagan years when the first hint of trouble surfaced.

Dolan Straight Talk Tip: If you're looking to buy a home, we recommend you lock in a rate TODAY.

Lately, the government doesn't have an enviable record of fixing disasters, so we'll be sure to keep you posted.

For more information, be sure to read:

• What to Do if Your Bank Fails
• Mortgage Meltdown
• Investing Alert: It's Officially a Bear
• Find the Best Mortgage for You
• How to Negotiate the Best Mortgage

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