30-Year Fixed Rate Mortgages - Will They Die With Fannie and Freddie?
The housing bubble emergency can be seen all across the country. Foreclosures in Michigan, short sales in Wisconsin and bank-owned homes in Indiana. It seems there isn't a state that's free from the foreclosure mess. But is the riposte to the problem to naturally shut down mortgage giants Fannie Mae and Freddie Mac? That seems to be the plan from the federal government. It's a goal House Republicans share with President Obama.
30-Year Fixed Rate Mortgages - Will They Die With Fannie and Freddie?
How Does This influence Me?
Shutting down Fannie and Freddie would likely lead to the end of something that's part of the American way of life: the 30-year fixed rate mortgage. Experts in the housing market from both political parties agree that interest rates would likely rise for most borrowers. Also, standard practices like locking an interest rate could come to be something home buyers pay for out of pocket.
Why is the Government Doing This?
Are the feds trying to ruin the American dream of home ownership? It's unlikely that the government naturally wants to cause problem for first time home buyers, other borrowers and the real estate industry. But its actions will likely do just that.
Mark Jones, president of AmeriFirst Home Mortgage recently gave me some understanding into the reasons and the fallout to this newest mortgage commerce move.
Most of the things the government is trying to do with the housing finance issue is based on the facility that the entire commerce was broken and that's what caused the meltdown. Now there is a huge push by politicians to over compensate with regulation and change to show their constituents just how tough they are.
The facts are that the commerce worked properly and without any need for intervention from the federal government until primary reputation standards that were used for decades were abandoned. Easy reputation standards fueled by Wall Street's insatiable appetite for high yield, and Fannie Mae/Freddie Mac's tacit endorsement of these new relaxed standards created a bubble that is now an epic binge from which we are still suffering from a long hangover.
However, the products that created the bad dream are now gone and our commerce is underwriting loans the way we traditionally have. The book of business complete over the past 2 ½ years is performing amazingly well and all of the players who made their livings in the Sub-prime and Alt A world are gone.
Instead of over regulating our commerce and reducing the government's commitment to housing straight through conclusion Fannie Mae/Freddie Mac and reducing Hud's role, I think the government should instead focus on products with lax reputation standards and consumer-unfriendly terms. In other words, let's fix what caused the problem and not destroy the whole commerce and homeownership along with it.
If the government needs a model for what works, they need to look no further than the department of Housing and Urban improvement (Hud) and specifically to Ginnie Mae (Gnma- Governmental National Mortgage Association).
In uncomplicated terms, Ginnie Mae does for Fha, Va, and Usda loans what Fannie Mae and Freddie Mac do for approved loans by providing a secondary market for "government loans". Ginnie Mae over the past two fiscal years has made a profit of over ½ a Billion each year.
Imagine, a government department that surely sends surplus funds (which is what they surely call it in their annual report to congress...I guess the P word is bad news in government) to the Treasury. The suspect that this has worked for Ginne Mae while Fannie/Freddie are hemorrhaging cash is because the reputation standards on the loans that Ginnie Mae provides liquidity for Never Changed.
The commerce was never broken; it just went crazy for some years.
Your Takeaway
If the government has its way, the standard of borrowing Americans are accustomed to could be taking its final breaths in the years to come. But instead of naturally killing Fannie/Freddie, the feds ought to look at other symptoms of the housing bubble catastrophe.
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