The Dismantling of Freddie and Fannie: What The Future Brings

If you haven't heard the recent news about Freddie and Fannie being dethroned from the realm of home loan guarantors, it's true. Well, sorta. The proposal has been made, but how to implement it is another thing. When it comes to protecting the value of your home, and the value of your future home, it is important to follow what direction they decide to go with this one. After all, housing value across the country is down, home ownership is down, distressed real estate is up... and it all started with loans that the federal government could no longer back up. It presently affects your ability to buy a home or to sell your home. From RISMEDIA:

"In a move that had been widely anticipated, the Obama administration said last week that it wants to get the government out of the mortgage business by winding down operations at Fannie Mae and Freddie Mac over the next five to seven years.

“Fundamental reform” is the aim, Treasury Secretary Timothy Geithner said in announcing the plan to not only “shrink the government footprint in housing,” but also “strengthen consumer protection and preserve access to affordable housing for people who need it.”

While it seems counter-intuitive that the present administration would proactively execute measures to, in fact, get the federal government out of the mortgage business, it is more important to look at what are the implications of this move, and how the real estate industry is reacting. RISMEDIA outlines some of the implications of it:


The plan calls for:

• Withdrawing government support of housing finance by gradually eliminating Fannie Mae and Freddie Mac, which would bring private capital back into the market. The government now guarantees nine of every 10 home loans, which Geithner says has discouraged private capital’s return.

• ”Leveling the playing field” for private capital by gradually making it more costly to get a loan at Fannie and Freddie.

• Reducing conforming loan limits—the maximum size of loans the two government-sponsored enterprises (GSEs) can guarantee—after temporarily increasing them, as scheduled, on Oct. 1. Geithner said the administration would work with Congress to make other changes in the future.

• Phasing in a 10% down-payment requirement for Fannie and Freddie borrowers, “to further protect taxpayers.”

• Winding down Fannie and Freddie investment portfolios at the current annual rate of 10%.

RISMEDIA further explains what the reaction has been: 

Though the stocks of private mortgage insurers such as Radian Group Inc. of Philadelphia rose shortly after Geithner’s announcement, reaction from other corners of the housing industry was less enthusiastic.

The 160,000-member California Association of REALTORS® said the plan would raise borrowing costs and restrict a safe and affordable flow of financing, further impeding a still-fragile housing recovery.

American Bankers Association CEO Frank Keating suggested that rather than develop a “silver bullet” solution to housing finance, policymakers should create a well-regulated covered bond market and enhance the Federal Home Loan Banks “to better help them meet their mission of providing advances to private market portfolio lenders with minimal taxpayer exposure.”

Saying that Fannie Mae and Freddie Mac’s multifamily programs “were not part of the meltdown” and are a “vital capital source for the rental-housing sector,” National Multi Housing Council President Doug Bibby urged the government to be cautious in its reform efforts.

Yet economist Anthony Sanders, a professor of real estate finance at George Mason University in Fairfax, V.A., said that aside from saving U.S. taxpayers hundreds of billions of dollars in the future, not much will change in a world without Fannie and Freddie.

“After pumping trillions into the mortgage market since 1998 through the GSEs, the homeownership rate is back to 1998 levels,” Sanders said. “Enormous pain and suffering occurred in the United States trying to go from 66 percent to 70 percent homeownership.”

So there are still proponents of government-backed mortgages, and those who look at the dismantling of Freddie and Fannie as long-overdue. According to The Wall Street Journal, just because the administration has declared that the Federal Government is leaving the mortgage industry does not really mean the Federal Government is leaving the mortgage industry. In his article "Views of Life After Fannie, Freddie" by Nick Tamaraios, he writes:

Producing three different options, instead of one clear recommendation, reflects the fact that there isn't a strong consensus within the administration or Congress, said Laurence Platt, a banking industry lawyer at K&L Gates in Washington. He described the proposals as "Goldilocks and the three options—one's too hot, one's too cold, one's just right, but everyone disagrees which one is which."

Bottom-line, what this means to you is that in the future, you can probably count on everyone's home purchase to be "one you can take to the bank," and the security you can have in the integrity of home purchase loans in general means security in the housing market. It also means that home loans will likely become not-too-easy, so now more than ever it is good to take care of your personal financial fitness and carefully monitor and improve your credit score before thinking about purchasing a house. It is also important to have a real estate agent who can be very effective in helping home buyers and home sellers navigate the purchase process, to make sure it goes smoothly, that there are no suprises, and that proper preparation is made. If you are a home buyer or a home seller in the Greater Houston Area, especially north Houston areas of The Woodlands, Spring, and Conroe/LakeConore, the Lauri Kent Team is exceptional in understanding the real estate micro markets. Call or Contact Lauri Kent Team with your real estate questions.