Nine out of ten mortgages in the U.S. are currently guaranteed by the government. Private capital has yet to return, which under normal market conditions should be the primary source of residential mortgage financing.
A report from the Administration provides a plan to reform the mortgage market. The plan is for Fannie Mae and Freddie Mac to find the exit from the mortgage business. Also included are reforms for stronger consumer protection, more protection for investors, stricter qualifying guidelines.
Highlights of the plan include:
1. Bring Back Private Capital
The report recommends new policies to wind down Fannie Mae and Freddie Mac, and bring private investors back to the mortgage market. Government support will be withdrawn at a pace that does not undermine the recovery of the housing market.
Increase Mortgage Rates
The report recommends ending advantages that Fannie Mae and Freddie Mac currently have by requiring them to price mortgages the same as private banks or financial institutions, so as to level the playing field for private investment.
Reduce Mortgage Amounts
The report says that Congress should reset the temporary increase in Fannie Mae and Freddie Mac conforming loan limits to the levels set in the Housing and Economic Recovery Act.
Bigger Down Payments
The report says more down payment should be required from borrowers when buying a home. Increasing required down payments reduces risk so that any mortgage that Fannie Mae and Freddie Mac guarantee will have a minimum 10% down payment.
Sell Mortgage Portfolios
The mortgage reform plan calls for continuing to reduce Fannie Mae and Freddie Mac’s investment portfolio at an annual rate of no less than 10% per year.
6. Make FHA More Conservative
The report recommends that Congress let the increase in FHA conforming loan limits to expire. Also put in place a 25 basis point increase in the cost of the FHA annual mortgage insurance premium, and consider options such as lowering the maximum loan-to-value.
Regulate Mortgage Securities
Set stricter disclosure requirements so that investors can more easily understand the underlying risks of securities, and establishing an Office of Credit Ratings to more effectively regulate the credit rating agencies.
Strengthen the Mortgage Market
The reform 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, and the strengthened oversight of financial stability.
How Will Reforms Affect Consumers?
Purchasing a home would require a larger down payment and will cost more in the form of higher mortgage rates and insurance. Refinancing a mortgage would also cost more for the same reasons. Qualifying for a mortgage would become more difficult because of stricter underwriting guidelines for loan approval. Home values would eventually become more stable.
Mortgage loans, and home equity loans.
|
|