The Obama administration announced plans to reform the housing finance market, including winding down government-controlled mortgage giants Fannie Mae and Freddie Mac and turning most of the market over to the private sector, as well as requiring larger down payments. The White House proposed three approaches to replacing Fannie Mae and Freddie Mac rather than offering up one final plan.
- Shrinking the size of the portfolio of mortgages held by Fannie Mae and Freddie Mac by at least 10 percent a year.
- Creating an insurance fund for mortgages, supported by premiums paid by lenders.
- Winding down government subsidies of mortgages by raising the fees charged to cover the risk of default.
- Raising fees for borrowers and requiring larger down payments for home loans.
The administration also recommended measures to make government-backed mortgages more expensive in order to allow the private-sector to better compete in the mortgage market. For example, it called for reducing by this fall the size of mortgages Fannie and Freddie may purchase from $729,750 to $625,500.
Raising Rates?
Some critics of the proposal are concerned that the administration’s overall plan would raise mortgage rates.
Treasury Secretary Timothy Geithner said that mortgage costs likely will rise in the coming years, as government support is withdrawn and the private sector takes on a bigger role. Credit Suisse has estimated that rates on a 30-year fixed mortgage may rise as much as 2 percentage points if the government withdraws its backing of Fannie Mae and Freddie Mac.
“Reducing the government’s involvement in the mortgage finance market is necessary for a healthy market, but should not be done at the expense of the economy or home buyers,” NAR President Ron Phipps said in a public statement in response to the Obama administration’s plan. “Any proposal for increasing fees and borrowing costs beyond actuarially sound levels will only make it harder for working, middle-class individuals to achieve home ownership, and only the wealthy will be able to achieve the American dream.”
“Most people in Congress understand that this is a very political, contentious issue,” says David Berson, a former Fannie Mae chief economist. “It’s going to be a very volatile ride as we move toward what ultimately will be the future of Fannie and Freddie. It’s hard to know what that’s going to be.”
In my experience as a Broker/Realtor® for 25 years I believe that Fannie and Freddie also allows uniformity and control in the major lending markets. Fannie Mae was created in 1938 and has been working fine, until 11 years ago. That’s when wall street’s greed influenced our government regulatory agencies to give in and ease up the lending standards guide lines to high credit scores and stated income. These practices, prior to 2000, would qualify buyers based on debt to income ratio’s and good credit. That’s when economic housing problems started and reared its ugly head 5 years later. The prices soared and the bubble started to burst.
These long lasting standing institutions Fannie and Freddie that created protection and uniformity for borrowers and the banking industry got changed by the year 2000 that allowed “the fox in the chicken coop”. The government is trying to blame Fannie and Freddie for the toxic loans that was caused by government deregulations, not Fannie and Freddie. We need to maintain our countries high standards that allowed us to survive all these centuries and not give into fear and greed. Its time to step up, tell the truth, rebuild and become a world leader again.
Take advantage of low rates, low home prices and incentives offered by Fannie and Freddie now before changes occur!
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