A new battle is heating up in Congress, as lawmakers debate the demise of Fannie Mae and Freddie Mac. These government-controlled mortgage guarantee giants either own or guarantee nearly half of all U.S. mortgages – including nearly 90% of all new mortgages.
Because they buy mortgages from lenders, package them as bonds, guarantee them against default, and sell them to investors, the banks that make mortgage loans are freed from risk and have more money to lend to more home buyers.
And that, many believe, is the reason behind the financial crisis. Fannie and Freddie relaxed their standards and guaranteed high-interest loans to high-risk borrowers. They also allowed banks to grant loans at extremely low “teaser” rates in order to qualify low-income borrowers. And of course those borrowers could not continue to pay once their interest rates re-set.
You may remember that at the height of the crisis, American taxpayers bailed out Fannie and Freddie to the tune of $187 billion dollars. Although they have since been profitable and have, in fact, repaid $132 billion, lawmakers believe it’s time to reduce taxpayer risk by moving mortgage lending back to the private sector.
So they all agree – but left and right have different ideas about how to go about it. House Republicans favor a plan that would nearly eliminate government involvement in the mortgage industry. They want to let the free market rule. However, they do want the FHA to continue insuring loans for first-time and lower-income borrowers.
They believe the resulting competition and innovation in the private sector will be a boon to consumers who will benefit from more choices.
Senate Democrats favor a scaled back but continued government role in backstopping the mortgage market. They believe government involvement stabilizes the housing market.
Under either plan, financial experts say we can expect higher payments for homebuyers. We might also expect higher down payments and tougher credit score requirements.
My own opinion on these plans is mixed. In most cases I prefer less government involvement in our lives. However, government guarantees do make home mortgages available to more people.
What I’d really like is for our lawmakers to spend time considering the possible intended and unintended consequences of any proposed changes – well before making any of those changes. This is a step they have failed to take in the past – and the housing industry has suffered for it.
Whatever is decided, we can expect the battle to rage for months or years before resolution. So today, rates are still low and requirements are still reasonable.
If you’re looking for a new home or want to refinance your present home anywhere in Texas, get in touch. We offer low rates and low fees – and we close our loans within 30 days.