Fannie Mae and Freddie Mac currently back well over half of all new mortgages, but this could be coming to an end. Last month, leaders of the Senate Banking Committee unveiled a bipartisan plan that would shut the doors on Fannie and Freddie. The plan proposes that Fannie and Freddie, who guarantee and issue mortgage-backed securities, will be replaced by a hybrid public-private finance system.
How will the new plan work?
Investors will pay a fee to insure the mortgage securities they buy, thus giving homeowners’ assurance that their loan is backed up by strong capital. If passed, this federally insured mortgage system will supposedly shut down the two financial institutions over the next several years. As a result, a new government entity would be created to guarantee mortgages. Then, private sector firms would bundle those mortgages into securities and market them to investors.
How will this affect my clients?
If all goes according to plan, then the first 10 percent of losses from guaranteed mortgage would be absorbed by private financers, not the government. As you can imagine, this rule was set in place to avoid another bailout like the one in 2008 that cost taxpayers $187 billion.
Although rates have remained relatively low, all changes made in the last 5 years towards attracting more private money in the mortgage market has resulted in higher fees for borrowers. A study produced for the trade group, Leading Builders of America by the Harvard Joint Center for Housing Studies, predicted that various government proposals to overhaul the mortgage finance giants would jack mortgage rates up anywhere from 0.25 and 1.5 percentage points. This rise can also be attributed to higher capital requirements and various other fees that are mentioned in the bill.
The study also indicated that borrowers with credit scores between 650 and 750 with down payments of 5%-15% were likely to be hit the hardest. The other major impact would be for long-term loans like 20, 25 or 30-year amortizing loans. Unfortunately, banks may be unwilling to put 30-year amortizing loans on their balance sheet because of today’s super low rates. This reluctance could keep many potential home buyers from being able to afford a home and could eventually lead to a fall in real estate prices.
With that being said, many analysts believe that the impact of any proposed overhaul has been a bit overstated. According to David Crowe, chief economist for the National Association of Home Builders, “most potential borrowers who would be affected by an overhaul aren’t looking for mortgages now due to tightening underwriting standards.”
There are two things that will happen if the U.S. Treasury’s plan clears Congress and the courts. The first, Fannie Mae and Freddie Mac will stop functioning on January 1, 2018. The second would be for the two institutions to enter a liquidation phase that could take at least 10 years. Whether this plan will pass remains speculated, but only time will tell if we will see the doors closing on Fannie and Freddie.
Looking for a way to streamline the mortgage process for your clients? Then download and share the Homes.com Mortgage Checklist to help them get their financial situation in order before applying for a loan, as it provides insight into what lenders will be looking for when reviewing a loan application. To find even more articles like this, check out Homes.com’s featured author Shashank Shekhar!
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