Winding Down of Fannie Mae and Freddie Mac Will Impact Mortgage and Housing Markets
Leaders of the Senate Banking Committee unveiled a bipartisan plan last month that would wind down Fannie Mae and Freddie Mac, and replace them with a hybrid public-private mortgage finance system, which will affect mortgage rates. Fannie and Freddie guarantee mortgages and issue mortgage-backed securities, and back well over half of new mortgages right now.
The bill proposed by Tim Johnson and Mike Crapo suggests that Fannie Mae and Freddie Mac should be replaced by a federally insured mortgage system. Investors will pay a fee to insure mortgage securities they buy and homeowners will have the assurance that their mortgage is backed up by strong capital. The new plan would shut Fannie and Freddie down, presumably over several years, and create a new government entity just to guarantee mortgages. Private sector firms would bundle those mortgages into securities and market them to investors.
The first 10 percent of losses from guaranteed mortgages would be absorbed by private financiers, not the government. That is to protect taxpayers from another bailout. Remember, the government sponsored enterprises were bailed out by taxpayers in 2008, at a cost of $187 billion as the housing market crashed.
The big question is how it will impact mortgage rates? Even though the rates have remained low, all changes made in the last 5 years towards attracting more private money in the mortgage market has resulted into higher fees for borrowers.
The study, produced for the trade group Leading Builders of America by the Harvard Joint Center for Housing Studies, predicted that various government proposals to overhaul the mortgage finance giants could cause rates to rise as much as 1.5 percentage points, according to a Wall Street Journal report.
The study estimated rates could rise between 0.25 and 1.5 percentage points as a result of higher capital requirements and various fees proposed in the bill, the Journal reported. Additionally, the study indicated that borrowers with credit scores between 650 and 750 with down payments of 5%-15% were likely to be hardest hit.
Other analysts say the paper overstates the impact of any proposed overhaul. David Crowe, chief economist for the National Association of Home Builders, said most potential borrowers who would be affected by an overhaul aren’t looking for mortgages now due to tightening underwriting standards.
The other impact would be on long-term loans like 20, 25 or 30-year amortizing loans. Banks may be unwilling to put 30-year amortizing mortgages on their balance sheet, especially at today’s super low rates. This will result in substantial reduction of affordability for home buyers, and consequently, a fall in real estate prices.
If the current plan from the U.S. Treasury clears Congress and the courts, two things will happen: Fannie Mae and Freddie Mac will stop functioning on January 1, 2018; they will then enter a liquidation phase that may take at least 10 years. Whether this will actually happen or not, only time will tell.
You can be sure of one thing though – Homes.com will keep you posted. For more mortgage-related news and tips, visit the Homes.com Idea Gallery.