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Government exiting mortgage biz

By Judy Martel · Bankrate.com
Wednesday, October 12, 2011
Posted: 3 pm ET

As the housing crisis drags on, the government is seeking to ease out of the mortgage business and let the private sector take control. That worries some analysts who don't want to see any more potential setbacks in a recovery.

Fannie Mae and Freddie Mac, the two largest mortgage companies, have had their troubles since the federal government took them over in 2008. Last month, the Federal Housing Finance Agency (FHFA), which has oversight of the two companies, filed suit against 17 banks, charging them with providing misleading information about the quality of loans. But two weeks later, it was announced that the SEC was prepared to reprimand Fannie and Freddie for their own part in the mortgage meltdown.

Mortgages backed by Fannie Mae and Freddie Mac are guaranteed by the government, an attractive benefit for investors, even if the returns are relatively modest. The two agencies, along with the FHA, are responsible for 90 percent of mortgages.

Congress has agreed that the goal is to eventually shut down Fannie and Freddie. This year, they've reduced the limit on jumbo mortgages back to $417,000 as the maximum that could be guaranteed. It had been raised to reflect higher home prices in certain expensive real-estate markets, but as of this month, the previous limit was restored. Industry analysts worry how this will reflect on mortgage rates and home prices, already suffering steep declines since the crisis began. Rates typically are higher for loans not backed by the government and borrowers are required to have a higher down payment.

The message to the private sector seems to be that lenders are going to have to hold all the risk for the loans they make. How this affects future homebuyers and investors is still an unknown; it could be a sea change in the way we define the American Dream and the way investors look at housing.

What do you think of the government's plan to move out of the mortgage business?

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3 Comments
tom
October 13, 2011 at 10:46 am

The government's stated desire to exit the mortgage business is disengenuous at best and pure sound-bite fabrication at worst. There is no breathing economist that believes the 30 yr mortgage can survive w/o government backstops. If the government exits, homeownership begins a steep decline and housing values fall off the page.
Anyone think any administration will allow that to happen? Anyone?