USA Today: Phasing Out Fannie, Freddie Could Lead to Higher Rates

Borrowers could end up paying higher mortgage rates under House and Senate bills that aim to eliminate government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, USA Today reports.

After the housing market crashed and a $187 billion taxpayer bailout was needed to rescue Fannie and Freddie, Congress has been looking for ways to reform the nation’s housing finance system 

The House Republican bill aims to virtually privatize the mortgage market, whereas the Senate’s bipartisan plan envisions a limited government role in insuring mortgage securities that would also keep mortgages available and affordable. 

The idea behind both plans is to shift more financing risk from the government to the private sector to prevent taxpayers from having to pay for future bailouts, however, having the private sector shoulder more risk could mean higher mortgage rates for borrowers.

Typical borrowers could pay about $75 per month in extra interest payments, notes the USA Today article, on average under the Senate proposal. Under the House plan, borrowers could end up paying about $135 more per month.  

Both scenarios are based on a conforming loan of about $200,000 with the borrower providing a 20% down payment.

A bipartisan dispute arises, as most Democrats tend to favor a continued government role because they say it stabilizes the housing market. 

House Republicans, on the other hand, want to end government involvement and let free market rule, as it would open up more options to borrowers. 

In the Senate, a bipartisan bill would gradually replace Fannie and Freddie over five years with a new agency, which would have a more limited role insuring mortgage securities against “catastrophic losses,” notes the article.

This agency to be created would be a new Federal Mortgage Insurance Corp. that would “provide backstop insurance available only after a substantial amount of private capital is used up.”

Under this system, 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 House aims toward the elimination of the government’s role in the mortgage financing system. As a result, the bill would also limit the Federal Housing Administration to insuring loans only for first-time and lower-income borrowers.

Read the USA Today article.

Written by Jason Oliva

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