The White House outlined last Friday its plans to begin shrinking their support of both of the government sponsored entities (GSEs) Fannie Mae and Freddie Mac and they will not be here in the future. While the process could take several years, the effects will be felt in coming months.
The government took over both GSEs in September of 2008 when the financial crisis took place. Both agencies have been in receivership which has cost tax payers an estimated $134 billion so far. If the housing market was not so fragile the timeframes would be much quicker to dissolve the two agencies.
Last year, Fannie, Freddie and FHA guaranteed 95% of all home loans. The role these government agencies have played has been crucial to the lender markets over the last 40 years. There would not have been a housing market the last two years had these agencies been dissolved as is the plan going forward. The goal is to have the private sector originate mortgages and securitize them without any government backing.
The proposed plan by the administration is to allow the maximum loan limits to fall to $625,500 from $729,750 beginning October 1st, 2011. The plan is to increase minimum down payments to 10% on all loans eligible for purchase by Fannie and Freddie. In addition, insurance premiums charged on new loans backed by the Federal Housing Administration (FHA) will also go up.
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