Freddie & Fannie Reform: President Obama said he would close Guantanamo Bay as
Soon as he became President. Now, the White House put out a plan to reform
Freddie and Reform. I am wondering which will close first, Guantanamo Bay or the
Nearly three years after the credit freeze of 2008 and the subsequent
deterioration of the US housing market, the Department of the Treasury and
Department of Housing and Urban Development have released a report to Congress
On how TO reform THE US housing finance market. The thirty-two-page document,
which is thick on promises but thin on details, presents three options for
reform – all of which include the winding down of the role of Government
Sponsored Entities, Freddie and Fannie, in mortgage financing to be replaced
with private market financing.
A thumbnail sketch of the three options offered in the report is as follows:
Option 1: No government role to support mortgage lending, except for limited
programs from the VA and FHA.
Option 2: Same as Option one except the government would also provide mortgage
guarantees when the housing market is in crisis.
Option 3: –The government would guarantee mortgages to below- and
moderate-income borrowers create a government reinsurance fund for
mortgage-backed securities to respond to a housing crisis and would offer
reinsurance for securities of some mortgages for a fee.
The goal of all three plans is the replacement of the GSEs with private sector
financing – a long-held dream of conservative pundits like Larry Kudlow from
CNBC. With the release of this report, the political punching bags Freddie and
Fannie received their final death sentence. AS WITH most inmates on death row,
however, the actual execution will BE DELAYED longer then ONLOOKERS expect.
By most estimates, the implementation of any one of these programs will take five
to seven years. I estimate that it will take more like 10-15 years before
Freddie and Fannie’s role is significantly diminished in mortgage lending.
The main reason why one of these options won’t be implemented sooner is that we
are still in a declining market, and private financing will likely be reluctant
to risk large amounts of capital without government guarantees against losses.
With little or no government support, when private financing is available it
will be at higher interest rates and higher up-front fees for home buyers.
These costs, in turn, will exert downward pressure on homes prices, possibly
leading to more defaults. More defaults, in turn, will result in less confidence
in the market and further declines in prices. If the country undergoes another
recession in the next 2-3 years, with another wave of foreclosures and price
declines, then private sector financing will be even more scarce.
While future homeowners will inevitably bear the financial brunt of these changes,
there will be economic winners due to these changes as well. The major banks,
mortgage insurers AND asset managers will be able to charge higher interest
rates and fees when their primary source of competition, the GSEs ARE removed from
the market. Smaller banks, on the other hand, will no longer be able to sell
their loans to the GSEs and will, therefore, join the future homeowners on the
When this story ends, the OUTCOME should be fascinating. I think back to
how we were supposed to end THE ERA OF ALLOWING BANKS TO BECOME “TOO BIG TO
FAIL.” I wonder how big the banks will be in 10-15 years from now.
Logan Mohtashami is a senior loan officer in his family-run Mortgage
The company, AMC Lending Group, which has been providing mortgage services for
California residents since 1987. LoganMohtashami.com
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