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Possible Upcoming Changes in the Mortgage Finance Industry

In the last couple of years significant changes have been made to the banking industry, but if current plans hold to a steady course, they will not be the only changes Americans will soon be seeing. Plans were recently unveiled by the Obama administration to give the mortgage market a complete makeover. Central to the plan would be the dismantling of Fannie Mae and Freddie Mac, thereby reducing the role of the government in the mortgage financing process. Steps in the plan include halting unfair lending practices, offering more highly targeted federal support for prospective borrowers and increasing private capital for mortgage loans. Under the new plan, changes would be phased in over several years.

Perhaps the most significant change of all would occur in the wind down of Fannie Mae and Freddie Mac; both of which are enterprises sponsored by the government for the purpose of purchasing home loans. Loans purchased by the entities must meet specific standards. They are converted into assets and then later sold to investors. These home loan purchases represent the majority of mortgages in the country.

At one time the two institutions were publicly traded. Following the downfall of the housing market, government aid came to the rescue in 2008. Since that time, Fannie Mae and Freddie Mac have received approximately $150 billion in assistance from taxpayers.

There are three different options that could result in significant changes to the mortgage market in the United States, once Fannie and Freddie have been dismantled. In one option, only mortgages that are backed by FHA or other programs designed for low to mid income borrowers would be guaranteed by the federal government. Another option would allow FHA loans to be backed, but additional steps would be required for governmental support. Yet another option plans for a type of safety net that would provide support for the mortgage market if another housing crisis should develop. Secretary of the Treasury, Timothy Geithner, has said that it could take at least five years, if not longer, for Fannie and Freddie to be completely dismantled and a permanent solution put into place.

What can prospective borrowers expect in the near future? The government has outlined a series of steps that could be implemented much sooner and which would seriously impact the way in which consumers around the country borrow mortgage funds. One recommendation has been made which would require Freddie Mac and Fannie may to price loan guarantees at the same level as private banks. Recommendations have also been given for Congress to make a temporary increase available in conforming loan limits. At the current time, Freddie and Fannie may only purchase loans up to $729,000. The increase will expire in October, lowering the limit to $625,000. Furthermore, down payment amounts required for loans that are backed by Freddie and Fannie would also be gradually increased. At the same time, the loan portfolios of those two companies would begin to shrink. Other plans of the administration include raising federal insurance premiums for mortgages. In the 2012 budget recently submitted by President Obama, a proposal was included for raising federal insurance premiums for FHA loans by 0.25%.

Prospective homebuyers can also anticipate that mortgage rates may soon be on the rise. While rates have remained low in the past few years, the reason from this largely stems from the fact that interest rates have been subsidized through taxpayer assistance, along with policies of the Federal Reserve. That may no longer be the case over the next several years.

One of the plans which would reform the mortgage market in the United States could potentially lead to increased down payment requirements of at least 20%, possibly 30%. Prospective buyers may still be able to obtain a loan and pay a lower down payment, but interest rates for such loans will likely be higher.

There may also be a smaller number of fixed-rate mortgages available in the future, particularly is the mortgage finance system becomes privatized. Banks have traditionally not favored the highly popular 30 year fixed rate mortgages because they know that if interest rates increase, consumers can simply refinance. At the same time, if interest rates go up, banks are stuck with the smaller rates.

Speculation regarding the possibility of eliminating the mortgage interest tax deduction has also increased. Currently, the deduction amounts to about $80 billion per year. Originally designed to promote the idea of homeownership, the deduction has been in place for years. With pressure mounting for the government to begin paying down massive amounts of debt, the deduction may also be one of the changes prospective homeowners see in the future.

While it remains to be seen exactly what types of changes will occur in the mortgage financing system, one thing is certain and it is that changes are on the horizon.



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