Freddie, Fannie Phase-Out Could Mean Higher Borrowing Costs for Consumers

10
Feb

Freddie, Fannie Phase-Out Could Mean Higher Borrowing Costs for Consumers

Mortgage lenders Fannie Mae and Freddie Mac are in the process of being phased out by the Obama administration with an end result that could mean higher costs and more limited home loan availability for consumers. The administration unveiled a proposal on Friday with three phase-out options that all call for a scaled-back role for the government.

Phase-Out Options for Fannie and Freddie

The Obama administration says it needs to work to phase out Fannie Mae and Freddie Mac, lenders that had been bought out by government after the 2008 mortgage loan crisis. An overhaul of the Fannie Mae and Freddie Mac has been talked about for months and now the administration says it has a proposal that could help move them on the right track.

In the proposal are three phase-out options:

A new government backstop of specific mortgages under a new federal “reinsurance model”
A more-limited backstop that would scale up primarily during times of economic crisis
No government backstop beyond existing federal agencies such as the Federal Housing Administration (FHA)

After the government took over the lenders in 2008, taxpayers have been on the hook for $134 billion. The administration hopes that the proposal could effective phase out the role of the government.

Steps to Shrink the Government’s Role Could Increase Consumer Costs

In the proposal are a set of steps that administration hopes could eventually shrink the government’s role. Unfortunately, these steps are expected to raise costs and limit loan availability for consumers. Currently, the administration proposes to:

Increase down payments: The administration wants gradual increases in minimum down payments so that Fannie and Freddie can buy loans with a minimum 10 percent down payment. Currently, borrowers can make smaller down payments if they purchase mortgage insurance.
Increase lender fees: The proposal also recommends raising the fees Fannie and Freddie charge to lenders in order to make mortgages that are not government-backed more competitive.
Require banks to hold more capital: Banks would be asked to hold more capital to withstand any future housing downturns.
Require homeowners to hold more equity: The proposal wants more conservative underwriting standards that require homeowners to hold more equity in their homes than currently required.
Reduce the roll of the FHA: The role of the FHA would be reduced, which could make it more difficult for homebuyers to secure low-down-payment mortgages.
Consider merging federal mortgage agencies: The proposal would consider merging the FHA and VA loan program, which are currently housed by separate government entities.

The administration reiterates how important it is for Fannie Mae and Freddie Mac to remain healthy since they are a critical part of the housing market, accounting for nine out of ten new home loans in 2010.

The $10.6 trillion mortgage market is undoubtedly ailing, currently saddled with record foreclosures, high number of underwater mortgages and low home sales. If these lenders are able to get back on track with the right plan, the administration believes the housing market has a better chance of getting back on track as well.

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