WASHINGTON (AP) — Homebuyers could feel the pinch if Congress follows through on plans to shut down Fannie Mae and Freddie Mac, the government-controlled mortgage guarantee giants that were rescued by a $187 billion taxpayer bailout during the financial crisis.
Borrowers would probably end up paying slightly higher mortgage rates under House and Senate bills that would phase out Fannie and Freddie over five years and shrink the government's huge role in guaranteeing mortgage securities. Fannie and Freddie teetered under a crush of massive losses on risky mortgages before being bailed out.
The House Republican bill would virtually privatize the mortgage market. The Senate's bipartisan plan envisions a continued but more limited government role in insuring mortgage securities. Supporters say that would keep mortgages available and affordable.
Congressional efforts to overhaul the nation's mortgage finance system got a boost Tuesday from President Barack Obama's call for changes that are generally in line with the Senate's bipartisan plan.
“It will mean higher mortgage rates,” said Mark Zandi, chief economist at Moody's Analytics. “The question is how much higher.”
Typical borrowers could pay about $75 per month in extra interest payments, about half a percentage point, on an average mortgage under the Senate proposal, Zandi estimated, and about $135 more under the House plan. That's on a conforming loan of about $200,000 with the borrower providing a 20 percent down payment.
“You have to assume that almost in any future model being drafted, loans will be more expensive,” said David Stevens, CEO of the Mortgage Bankers Association and a former Obama administration housing official.
Most Democrats tend to favor a continued government role backstopping the mortgage market because they say it stabilizes the housing market. Many House Republicans, especially conservatives, want to end government involvement and let the free market rule. Given the split, the rival bills stand as opening markers in a long fight.
Hensarling's bill recently cleared his committee without any Democratic votes and is expected to get a House vote in the next few months.
Housing advocates warn that if the government's role is scaled back too far, mortgages could be pushed out of reach for people with lower credit scores and smaller savings for down payments.
They say 30-year fixed-rate mortgages, long a staple of the housing market, could become harder to find and more expensive for borrowers with modest incomes.
“Those people are now going to be locked out of the system or many will end up paying a premium because of these changes,” said John Taylor, chief executive of the National Community Reinvestment Coalition, a housing advocacy group.
Fannie and Freddie own or guarantee nearly half of all U.S. mortgages and 90 percent of new ones. They buy mortgages from lenders, package them as bonds, guarantee them against default and sell them to investors. That helps banks get rid of risk from their balance sheets, freeing up more money to lend.
During the financial crisis, as house prices tanked and foreclosures surged, the government rescued Fannie and Freddie from a flood of defaults on risky loans the agencies had guaranteed, many aimed at providing affordable housing for lower-income borrowers.
In the Democratic-controlled Senate, a bipartisan bill by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., would gradually replace Fannie and Freddie over five years with a new agency having a more limited role insuring mortgage securities against catastrophic losses.
The bill would create a new Federal Mortgage Insurance Corp., which would provide backstop insurance available only after a substantial amount of private capital is used up. Investors would pay insurance fees to the corporation while agreeing to put a substantial amount of their own capital at risk.
The bill in the GOP-controlled House nearly eliminates the government's role in the mortgage financing system. It would limit the Federal Housing Administration to insuring loans only for first-time and lower-income borrowers.