Fannie & Freddie Shifting Risk

While Fannie Mae and Freddie Mac have been instrumental in the growth of home ownership in this country, they have also been a factor in the encouragement of lax lending by banks and mortgage lenders. This brought about a financial crisis, and a takeover by the government. The FHFA, Federal Housing Finance Agency, now controls the activities of Fannie and Freddie, and “things they are a-changing.”

It’s now three years after the federal government took over the two mortgage giants, and there still is no clear plan as to whether or how to extricate them from the mortgage guarantee business. Lobbying is obviously in play to keep them around, as the fear is that without some type of government backing or guarantees, the housing market will never recover. Others, but not as many, believe that turning it all over to the private sector can eventually result in stronger mortgages and a stable housing market with growth potential.

The FHFA wants to spread out the lending risk, maybe keeping Fannie or Freddie or both around, but with less exposure to risk. So, while Congress wrestles with the finances and politics of the fate of Fannie and Freddie, the FHFA is taking steps under its authority to shore up their finances and keep them solvent, hopefully without more huge bailouts.

One method that’s proposed, and likely to go into effect by next year is an increase in the loan guarantee fee that Fannie and Freddie charge lenders, and they pass on to borrowers. The current proposed increase is one-tenth of one percent. This would add about $15 to each month’s payment on a typical $220,000 home loan. The Obama administration is proposing this fee increase, stating that it would save the budget around $28 billion over 10 years.

This fee increase won’t be the same everywhere and for everyone, as it is proposed that the fee change be based both on the individual risk profile of the borrower, and the location of the home. In states where it is more expensive and time consuming to foreclose, the fee would be higher.

It seems like déjà vu all over again, but most of the activity going on to try and stabilize and improve the housing markets is not changing the near term outlook for real estate investors. It’s still about rock-bottom home prices, increased rental demand, rising rents, and more profits.