The Administration's plan to wind down Fannie Mae and Freddie Mac over the next five to seven years and replace their functions with new regulation and private sector capital announced this morning contains some short term surprises that will impact real estate consumers and the housing economy within the next year.
The two government-sponsored enterprises will cease to exist and with them a legacy of 80 years of direct federal support for housing finance. Most of their current functions in the market place will largely be absorbed by private lenders and investors. The plan is less specific about the fate of the GSE's affordable and minority homeownership responsibilities.
Most of the changes described in the plan require congressional review and approval before they can take effect. Some are scheduled to take effect in the next 12 months and their impact will be market-wide; today the government guarantees more than nine out of every 10 new mortgages.
More Expensive Mortgages. The plan phases in increased pricing at Fannie Mae and Freddie Mac to end their capital advantages over private lenders to "help level the playing field for the private sector to take back market share." The timing and impact of the increased pricing will depend significantly on market conditions, but the Administration recommends bringing Fannie Mae and Freddie Mac to a level even with the private market over the next several years. The result will be more expensive mortgages for consumers.
Lower Loan Limits. Unless Congress steps in, on October 1, 2011, the upper limits on loans that Freddie, Fannie and FHA will guarantee in high cost markets will fall from $729,750 for a single family home, the limit in effect since 2008, to $417,000. Borrowers needing financing above that limit will be forced to turn to the privately financed jumbo market, where rates are higher.
Increased Down Payments. The plan phases in a 10 percent down payment requirement for any mortgage that Fannie Mae and Freddie Mac guarantees eventually has at least a 10 percent down payment. This requirement will increase demand for private mortgage insurance. Shares of mortgage insurers jumped as high as 11 percent when the plan was released this morning.
Higher FHA Insurance. "As Fannie Mae and Freddie Mac's presence in the market shrinks, we will encourage program changes at FHA to ensure that the private sector – not FHA – picks up this new market share," states the Treasury plan. In addition to the change in loan limits, the Administration will put in place a 25 basis point increase in the price of FHA's annual mortgage insurance premium, which is paid in 12 monthly installments. FHA just increased the annual MIP payment to .85 percent last October. The new rate will be 1.10 percent. FHA currently accounts for 30 to 40 percent of all new purchase mortgages, and more than half of all mortgages taken out by first-time buyers.
Homeownership No Longer a Goal. For the first time since the Depression, the Treasury plan makes it clear that homeownership pis no longer a policy goal. "The Administration believes that we must continue to help ensure that Americans have access to quality housing they can afford. This does not mean, however, that our goal is for all Americans to become homeowners. Instead, we should make sure opportunities are available for all Americans who have the credit history, financial capacity, and desire to own a home have the opportunity to take that step," the plan states. At no point does the plan discuss closing the gap between white and minority homeownership, which has reached a twenty year high.
The plan calls for stronger capital standards to help ensure that banks can better withstand future downturns, declines in home prices and other sudden shocks, without jeopardizing the health of the economy. It also advocages supports several immediate and near-term reforms to correct problems in mortgage servicing and foreclosure processing. These include putting in place national standards for mortgage servicing; reforming servicing compensation to help ensure servicers have proper incentives to invest the time and effort necessary to work with borrowers to avoid default or foreclosure; requiring that mortgage documents disclose the presence of second liens and define the process for modifying a second lien in the event the first lien becomes delinquent; and considering options for allowing primary mortgage holders to restrict, in certain circumstances, additional debt secured by the same property.
Though it is specific on short-term changes, the plan falls short of describing what the federal role in the housing market will look like in future years. The report puts forward several choices for structuring the government's future role in the housing market without advocating any particular option.