The Dodd-Frank law has legally mandated a makeover for mortgage giants Fannie Mae and Freddie Mac. Fannie and Freddie, along the FHA (another government- backed agency), are behind nearly 90% of US mortgages. The goal of reform is to make sure we do not ever see another financial meltdown requiring a $150 billion dollars taxpayer bailout.
The question: how much should the U.S. government be involved in mortgage availability?
The challenge: making sure home buyers can get affordable mortgages.
Will Fannie and Freddie disappear completely? No one knows yet but what is become clear is that the government's role in mortgage markets is likely to become a lot smaller. At stake is a 10.6 trillion dollar mortgage market.
There is no consensus on how to best meet the challenge and no single proposal has been made to overhaul the system. With last week's issuance of a long-awaited Obama Administration report, three plans representing three possible futures are now on the table. With real estate described as "fragile", change will be implemented slowly and carefully and is likely to take at least five to seven years. But the first changes are coming and are meant to attract private capital into the mortgage market and to lessen the influence of Fannie and Freddie. As of October 1, 2011, both mortgage giants' ability to make mortgages is going to be decreased by lowering their maximum loan limits to $625,500 and by requiring higher down payments of at least 10%. Insurance payments on loans backed by FHA could also go up.
The Three Proposals:
Option #1 would almost totally privatize housing finance. That proposal is similar to the one offered last year by Texas Representative Jeb Hensarling. Fannie Mae and Freddie Mac would disappear; lenders would originate their mortgages and then securitize them (sell mortgages to private investment) without any government backing. Only the FHA, currently backing about 20% of mortgages, would remain in place, financing low and middle income borrowers, theoretically higher-risk and less appealing to investors.
Option #2 is a modification of option #1 leaving the mortgage markets in the hands of private investors but adding a government backstop mechanism which would either buy or guarantee loans, an option to be activated only if private lenders decided to withdraw from mortgage markets during periods of financial crisis.
Option #3 would create new privately owned companies whose role would be to buy mortgages from banks and sell them as securities. Those financial instruments would be explicitly guaranteed by the U.S. government but would have to meet certain minimum criteria. The government would collect fees for that guarantee much as the FDIC (Federal Deposit Insurance Corp) now guarantees bank deposits.
While there is much support for a decrease in government intervention in mortgage markets, levels of trust in the Wall Street banks and investors who helped create the recent meltdown is not high. Their mortgage portfolios have performed much worse than Fannie and Freddie's. There is also fear that rising costs will threaten access to mortgages. Debate is certain to be fierce.
What is all this likely do to consumers? What should you do now? If you are interested in buying a new house, relocating, or want a second vacation home, housing prices are now as low as they have been in several years and inventory is high. It's a buyers' market. Interest rates have already jumped up - signals that the time to put off buying is over. Even if prices fall a bit more, any gain is likely to be offset by higher interest rates and more fees.
Learn more about Lake Lure and the Western North Carolina Blue Ridge mountain lake region at http://www.DiscoverLakeLure.com
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