What Impact Will Downsizing of Fannie Mae and Freddie Mac Have on the Housing Industry?
The buzz online in real estate and mortgage brokers is the government’s downsizing of Fannie and Freddie. The purposed seven year plan to slowly eliminate the government’s risk exposure to the mortgage industry, does not come with ease. Three options are possible as industry experts and government officials discuss how to slowly ease out of the mortgage market.
Most likely in the fall of 2011 around October it is probable some of the changes will start to happen. For instance the maximum loan amount will be reduced from $729,750 to $625,500. Also loans that maybe sold to Fannie and Freddie will need to meet tighter guidelines and this all impacts the future of home ownership for many Americans. You certainly will see less purchase as more money will be required to buy a home as a down payment and also tighter guidelines from lenders to minimize the risk to investors. There are still a lot of adjustable mortgages that have yet to adjust, which in turn will only increase the foreclosure rate slowly over time. As more and more Americans fight the cost of goods increasing, a slacking economy the outlook for the next few years looks pretty grim.
Let’s take a closer look at what may happen to the lending giants.
The first option would privatize mortgage securities without any government backing. As it is now Fannie and Freddie play the go between and that would no longer exist. Not only would Fannie and Freddie slowly disappear, but other government agencies like FHA would also under go some major changes.
The second option, championed by a handful of economists, would also create a mostly private market with a limited government backstop that would primarily become active buying or guaranteeing loans in periods when private lenders retreated during financial shocks.
The third option would create new privately owned companies to buy mortgages from banks and sell them as securities. Those securities would be explicitly guaranteed by the government as long as they meet certain criteria. The government would collect fees for that backing, just as the Federal Deposit Insurance Corp. insures bank deposits and regulates banks.
As political officials will debate and argue over how to best restructure the mortgage lending in the country it will certainly be a heated discussion for months to come. Some data does show private lenders and not Fannie and Freddie had the most defaulted mortgages. Regardless of the reform may take place, it will be a much watched subject over the next few months and year.