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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