House Refinance Center
Fannie Mae and Freddie Mac Overhaul Begins
Plan To Dissolve
Fannie Mae and
Freddie Mac:
$150 Billion Too
Late
Overhaul of Fannie
and Freddie Will
Increase Mortgage
Costs
The Obama Administration is putting
forward three proposals to get rid of Fannie
Mae and Freddie Mac. Remember that
these are simply proposals at this stage.
The final action is a political hot potato
which requires legislative action and has to
be voted on by a divided Congress. With
an election on the horizon in 2012 there will
be heated debates in Congress before any
plan can be written into law. The
Republicans have called for the two
agencies to be abolished and have blamed
both for the 2008 housing crisis.

Fannie and Freddie have cost the
taxpayers over $150 billion due to the
bailout. Considering that these were dire
times and most of the private lenders
withdrew from the mortgage market, the
money was well spent. There were plenty of
foreclosures and I am sure that there will be
millions more to come. But thousands of
homeowners were able to keep their
houses and there were no "breadlines" or
mass starvation.

The three options on the table are.

1. No government role or involvement. The
exception to this is the Federal Housing
Administration (FHA).

2. A government guarantee of private
mortgages. The government will be
involved and come to the rescue only when
the market is in trouble.

3. Government insurance for certain
mortgages that have been insured by
private insurance companies. The
government will step in and pay if the
private insurance companies are unable to
pay. In other words, the government will be
the "re-insurer".

All three proposals maintain some level of
government involvement. This is very
confusing. I would prefer the government
take a stand. We are "in" or we are "out".
We can expect mortgage rates to increase
when Fannie Mae and Freddie Mac pull out
of the mortgage business. This is not a
done deal yet but banks and other lenders
will not wait. This is an opportunity for them
to increase rates by 1% or 2%.

Currently Fannie and Freddie are involved
in nine out of ten new mortgage
transactions. When these two pillars of the
housing market are demolished, the private
lenders will have to step up and provide
capital. Investors of this capital will see
more of a risk without the guarantee of
Fannie or Freddie. Therefore, to get
investors into the market the incentive of
higher returns has to be on the table. This
translates into mortgage rates 1% to 2%
higher.

Banks and other mortgage lenders prefer
to see more adjustable rate mortgages.
These rates fluctuate with the market.

Another concern to homebuyers is the new
down payment. Many are calling for a
minimum down payment of 10%. If this
becomes law, we will see thousands of
potential homebuyers sitting on the
sidelines. They will have to wait another 3
or 4 years to save up the down payment.

The proposal also wants to increase the
mortgage insurance premiums being
charged by the Federal Housing
Administration (FHA).

Looking on the bright side, I can see house
prices dropping. So, which is better? A
higher mortgage rate plus 10%
downpayment, or a lower house price?
This has to be a personal decision. If you
are buying a house in the next 12 to 18
months the changes will work in your favor.
If you own a house and plan to sell in the
same time period, the news is not that
great.

But we are just speculating at this stage.
We have about two year before a final
decision is made. In the meantime, we can
sit back and listen to the various debates.
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