There is good financial news for many of the 46,000 U.S. reservists called up for military duty in the Middle East: They are about to get a big break on their home mortgages.
Under a 1940 law -- the Soldiers and Sailors Civil Relief Act -- interest on debts incurred by military personnel before they were called up for active duty is capped at 6 percent. Though few would dispute that the law is a nice and needed gesture, the big question in today's cut-throat financial markets is: Who pays?
Fannie Mae and Freddie Mac, the government-sponsored, stockholder-owned financial institutions, provided part of the answer yesterday. Both of the D.C.-based entities said they will absorb the difference between the 6 percent interest rate and the borrower's current rate for mortgages they hold. Between the two of them, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac) own about one in four mortgages in the United States.
Individual borrowers used to dealing with their banks may not even realize that their mortgages may be owned by Fannie or Freddie. That's because the bank or savings and loan that made the original home loan often continues to service the loan and remains the point of contact for borrowers. However, many banks do not hold the mortgages for long, selling them on the financial markets.
Fannie Mae and Freddie Mac will absorb any losses from the forgiven interest. Other financial institutions have yet to announce their plans.
Henry Cassidy, Freddie Mac's senior vice president for credit policy, said the law was "not 100 percent clear" on who had to pick up the tab.
"Someone has to pick it up. Since we own the mortgages, it's our responsibilities ... " Cassidy said. "We decided for patriotic and business reasons to step up to the plate." Though career military personnel may be eligible for the interest reduction, the law mostly applies to reservists.