Did you know that approximately 9 out of 10 mortgages currently being funded in the US are owned by the government? Private mortgage capital should be the main source of home loans in a normal housing market. Now the government is planning an exit strategy.
The Administration submitted a mortgage reform plan to Congress outlining some recommendations that could substantively change the cost of home financing, and sometimes even influence real estate values.
The plan includes these recommendations:
1. Phase Out Fannie Mae & Freddie Mac
New policies are recommended to phase out Fannie Mae and Freddie Mac, and bring private capital back to the real estate market. Support from these government agencies will be withdrawn at a pace that does not negatively affect the recovery of the housing market.
2. Natural Mortgage Rate Adjustments
Mortgage pricing advantages that Fannie Mae and Freddie Mac currently have to be ended by requiring them to price mortgage loan rates the same as private banks or financial institutions, in order to level the playing field for private capital investment.
3. Reduce Maximum Loan Amounts
Congress is encouraged to reset the temporary increase in Fannie Mae and Freddie Mac conforming loan limits to the levels set in the Housing and Economic Recovery Act.
4. Require Larger Down Payments
Larger down payments are recommended from borrowers who are purchasing a home. Increasing the size of down payments lowers the risk of default so that any home loan that Fannie Mae and Freddie Mac guarantee will have a minimum 10% down payment.
5. Reduce Portfolio of Loans
Reducing the size of Fannie Mae and Freddie Mac's mortgage investment portfolio is recommended at an annual rate of no less than 10% per year.
6. Reduce the Role of FHA
Congress is encouraged to let the recent increase in FHA conforming loan limits expire. Also add a 25 basis point increase to the cost of the FHA annual mortgage insurance premium, and consider options such as lowering the maximum loan-to-value.
7. Protect Capital Investors
Set rules for stricter disclosure requirements so that investors can more easily understand the underlying risks of mortgage securities, and establish an Office of Credit Ratings to more effectively regulate the credit rating agencies.
8. Prepare for Potential Problems
Stronger capital standards are recommended to help ensure that banks can better withstand future downturns, Declines in home prices and other sudden shocks, without jeopardizing the health of the economy, and the strengthened oversight of financial stability.
What would be the likely impact on borrowers?
If these reforms actually become reality, buying a home may cost more because of higher down payments, mortgage rates and insurance premiums. Refinancing may drop off because of similar reasons, and qualifying for a mortgage would become more difficult. Also, there may be a large migration toward FHA loans.