Proposals to phase out Fannie Mae and Freddie Mac may make 30-year fixed-rate mortgages harder to find, housing experts say.
An outline drafted by the Treasury Department, the Department of Housing and Urban Development, and the White House and circulated last month calls for winding down Fannie and Freddie over the next five to seven years. Congress continues to debate the future of Fannie and Freddie, and how and whether it should move to phase out the government-sponsored enterprises (GSEs). For its part, the Obama administration has argued for scrapping the GSEs, but replacing them with some form of federal involvement in mortgage financing.
But housing experts warn that 30-year fixed rate mortgages – a popular choice among buyers – might become harder to find and more expensive without Fannie and Freddie to buy them. Banks may be less willing to extend credit at a fixed rate over such a long term, housing experts note, since investors often prefer loans with adjustable rates rather than loans with longer terms, which expose them to interest rate risk.
“Traditionally, banks have been less willing to keep 30-year fixed-rate mortgages on their balance sheets, so in the absence of a vibrant securitization market, banks would more heavily favor adjustable-rate products,” John Mechem, a spokesman for the Mortgage Bankers Association, told The New York Times.
There is a lot of uncertainty about the process of phasing out Fannie and Freddie and how it will affect mortgage products, Barry Zigas, the director of housing policy at the Consumer Federation of America, told The New York Times.
Alex J. Pollock, a former chief executive of the Federal Home Loan Bank of Chicago, told The New York Times that he believes 30-year loans would remain available regardless of a federal guarantee, but they might be more difficult to find and lenders might require larger downpayments and better credit scores.
“One of the reasons that American housing finance is in such bad shape right now is the 30-year mortgage,” Pollock argues. “For many people, it’s not at all clear that that’s the best product.”
Source: “A plan to phase out Fannie Mae and Freddie Mac,” The New York Times (March 6, 2011) and “Without loan giants, 30-year mortgage may fade away,” The New York Times (March 4, 2011)