On Tuesday, President Obama laid out his latest mortgage plan for an overhaul of the country's mortgage system, even as both GSE's are showing a huge profit this year. Part of this plan includes eliminating Fannie Mae and Freddie Mac.

Winding down Fannie Mae and Freddie Mac has been a major talking point in recent years as many feel that taxpayers were left "holding the bag" for bad decisions made at both of these mortgage giants. According to Obama, housing reforms are still necessary so that a housing market recovery does not become another housing bubble. Part of that effort is replacing both GSE's with a new system which puts the private sector at risk for loans that are approved. At the same time, the President wants to be certain that consumers continue to retain access to the most popular mortgage type, the 30 year fixed rate mortgage.

The President again spoke about expanding refinancing for homeowners that do not have government backed mortgages so that they, too, could save thousands of dollars per year. This proposal, which would be similar to the HARP refinance program, has remained in limbo in Congress for quite some time. Obama emphasized the need to pass legislation to reduce regulations so that qualified homeowners could refinance at the current mortgage rates. In addition, he also mentioned refinancing with low or no fees attached.

A portion of his speech was a warning that lenders who approve high risk loans should not expect assistance from the government in the future. However, he did encourage support for affordable housing and homeownership for the first time home buyer. He remarked that FHA should be strengthened so that families can use FHA loans to purchase a home. At the same time, he also promoted affordable rental housing and the effort to continue fighting homelessness.

While most of these are good ideas, especially in light of the current housing market, eliminating Fannie Mae and Freddie Mac seems questionable, especially when they have turned from failing to profitable entities. Both GSE's purchase or guarantee mortgages from lenders, package them as bonds and sell them to investors. This allows banks to continue to lend money to new home buyers. At the current time, half of all of the nation's current mortgages are owned or guaranteed by the GSE's and approximately 90% of new loans are backed by them. During the housing crisis, both entities were rescued with approximately $188 billion in taxpayer money. However, the turnaround of the housing market has made them very profitable. Both companies have already paid almost $132 billion in dividend payments; Freddie Mac is expected to pay another $4.4 billion by September.

The administration also emphasized the need of the 30 year fixed rate mortgage for homeownership because if the industry was turned over to the private sector, there is the risk that long term, secure loans would not be offered as readily as they are today. For example, the jumbo loans are not sold to the GSEs or government insured. These loans go through the private sector and are usually adjustable rate mortgages that also have strict guidelines. If this was to happen on all mortgages, this could lead to a major reduction in homeownership for low to middle income consumers.

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