The future of the home mortgage
We've heard a lot about change over the past couple of years, and we've sure had a lot of it. Some of the biggest changes have been in the real estate markets, most of it not good, and most of it not done.
On Feb. 11 a report to congress was published by the Treasury and Department of Housing and Urban Development (HUD) regarding the country's mortgage system. The report, entitled "Reforming America's Housing Finance Market," discusses the nation's mortgage complex during the years leading up to the crash of 2008.
The major recommendation of the report is the winding down of Fannie Mae and Freddie Mac over a period of five years or more to be replaced by private mortgage markets. The recommendation was made in an effort to prevent taxpayers from having to bail out institutions such as Fannie and Freddie in the future.
Although Fannie Mae and Freddie Mac were initially supposed to support liquidity in the mortgage market so mortgage funds were more widely available, they went far afield of their charters. Since both companies were looking at lush profits, they kept pouring more and more liquidity into the system with less and less restrictions.
The larger issue is what if anything will replace Fannie Mae and Freddie Mac. Some of the suggestions involve no government role except for existing agencies like the Federal Housing Administration, or a plan that would be a government guarantee of private mortgage markets solely as a lender of last resort.
Either one of these would probably make home loans more expensive and even put in question traditional 30-year fixed rate mortgages, or at least make them much more expensive, in favor of adjustable-rate mortgages. Whatever happens, it will take a long time to iron out, continuing to keep the real estate market edgy at least for those who need financing.
However, when the mortgage markets are finally modified it should make for a much healthier industry. Buyers will be required to put more money down, have verifiable income and assets and properties would have to appraise at acceptable margins. If this can be accomplished, the end result could actually bring down the risk associated with providing mortgages resulting in mortgage costs declining. Less risk and costs to lenders would inevitably translate into savings and better rates to consumers.
For the short term, the Treasury Department and HUD have made several suggestions. One that could have an effect in our real estate market, is reducing the maximum size of mortgages purchased by Fannie and Freddie by more than $100,000 to $625,000 before the end of the year. They will also now require a 10 percent down payment for all loans, ending previous programs accepting minimal down payments, and the fees for government guarantee mortgages would increase.
There are already plenty of other ideas out there from the brainy bean counters with MBAs, and there will be plenty more before we see the final products. But the way it looks now is there will be a lot less government intervention in the mortgage markets, keeping taxpayer risk to a minimum.
When it comes to the financial situation of the country and particularly the real estate industry, the more things change the more they continue to change. Sometimes I wish it was 1955 again.
