An issue that seems to have rare bi-partisan support these days in congress is the bill to close down Fannie Mae and Freddie Mac over the next 5-7 years. The reason for this plan is simple. These privately run institutions have always been government backed and when the housing market slumped and then the banking system crashed, tax payers had the opportunity to bail them out at a price tag of an accumulated $150 billion dollars and counting. Now I have never really understood the wisdom of a private company running with a government safety net but to close down these institutions will have a significant change in the mortgage industry.
What Fannie Mae and Freddie Mac do is buy mortgages. When Fannie Mae was created in 1938 after the depression, it was a government entity that bought up mortgages to give the banks the opportunity to give new loans in their communities. It later became a publically traded company in 1968 and expanded the secondary mortgage market and traded mortgage backed securities.
This has benefited the banks by giving them a market to sell their mortgages and increase their cash flow to improve their bottom line or free up cash to make new loans. Now Fannie and Freddie wouldn't just buy any loan. They did have guidelines about what loans they would buy, but as lending became more freewheeling and congress pushed to expand home ownership to more Americans, those guidelines were loosened.
This has benefited home buyers with the 30 year fixed interest home loan. A thirty year mortgage is a product that is not seen outside of the United States. The rest of the world uses 15 or 20 year loans. By having these entities in place, banks have been more comfortable with 30 year fixed interest rate products because they knew they had a market where they could sell the loans if they chose to or needed to. Without secondary market to sell these loans on, 30 year fixed rate loans are going to look much less attractive to lenders.
Without Fannie and Freddie I expect 30 year mortgages to go away and 15 to 20 year terms take their place. This means home buyers will be able to afford less of a home. Adjustable rate loans will also become more prevalent, interest rates will continue to rise, and you will need a higher credit score to obtain a loan. In short, loans will cost more and harder to get.
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