The White Paper
Last Friday the Obama Administration released their much-anticipated ‘white paper’ to reform the housing finance market. The paper outlines plans to significantly reduce the government’s involvement in Freddie Mac and Fannie Mae, the two major lenders for 9 out of 10 American homeowners. The overall idea is to shift the government’s hand in funding home loans over to private investors, in the hopes to eventually “level out the playing field”. The Administration acknowledges that their plan for reforming the mortgage market will be a slow and steady one, so as not to disrupt an already fragile market.
However, there is much debate between interest groups. Real estate groups are shaking their fists over the prospect of waving goodbye to Freddie Mac and Fannie Mae, since the two companies have accounted for about 60% of American loans. One major concern, strongly backed by powerful groups such as the Mortgage Bankers Association, the Financial Services Roundtable and the Center for American Progress, is that without government support, taxpayers may once again end up responsible for bailing out private lenders. Both the Mortgage Bankers Association and the Center for American Progress recommend implementing “mortgage-credit guarantor entities” which would include federal regulators and charters in able to guarantee mortgage-backed securities. Big banks, on the other hand, are naturally eager to replace Freddie Mac and Fannie Mae as major lenders.
The White Paper itself presents a few different options for reform after fully phasing out Freddie and Fannie. The first option would allow the government to only guarantee mortgages for borrowers with low to moderate incomes that are backed by the Federal Housing Administration.
Other options would also include backing of FHA loans, but at the same time they would offer slightly more government support. According to CNN Money, “one proposal would create a ‘backstop mechanism’ to support the mortgage market during a crisis […while] the other focuses on providing insurance for mortgage-backed securities”.
While the plans put forth by Obama’s White Paper could take more than several years to take effect, an article printed today in The Washington Post points out that “some of these transitional steps require no congressional approval and therefore are likely to affect borrowers and homebuyers in the months ahead”. Notably the insurance fees on FHA loans are expected to increase and there’s a possibility for significant reductions in maximum loan amounts granted by FHA and other lenders.
Ultimately, no matter what your economic circumstance is, you can expect to pay more for a mortgage once the new reforms take place.
Courtesy of CNN Money, The Washington Post, The New York Times, and Realtor.org
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