Obama report on Fannie, Freddie plan may boost mortgage rates

The Obama administration wants to raise fees for borrowers and require larger down payments for home loans as part of a long-term effort to restructure the nation's housing market. But it warned that these measures could boost mortgage rates and make it harder for home buyers to secure the 30-year fixed-rate mortgage, a mainstay of American home buying for decades.

In a long-awaited white paper, the administration said it intends to wind down the federal mortgage giants Fannie Mae and Freddie Mac and curtail the Federal Housing Administration to help reduce the government's outsized role in mortgage funding.

The housing finance system, which has ensured that Americans can get home loans, came crashing down in the financial crisis, helping fuel millions of foreclosures and the recession.

"I think it's absolutely the case that the U.S. government provided too much support for housing, too strong incentives for investment in housing," Treasury Secretary Timothy F. Geithner said Friday during a speech at the Brookings Institution. He noted that in addition to those fundamental mistakes, the government "allowed a huge amount of basic mortgage business to shift where there was no regulation or oversight."

But in proposing a strategy for the future, administration officials acknowledged they are walking a tightrope. Any steps that dial back government support too dramatically - making mortgages more expensive - could extend the housing decline.

Geithner said that a new housing finance system without Fannie and Freddie could take seven years to put in place, suggesting it might fall in part to future administrations.

"We have to see the process of repair in the housing market completed," Geithner said.

The white paper focuses on a series of short steps to increase fees and down-payment requirements. The administration hopes these measures will allow banks to more effectively compete in offering loans without government guarantees.

The report offers three options for replacing Fannie and Freddie. They include creating a new government agency that would continue to insure mortgages or a new agency that would step in only during times of crisis. Each, however, could put taxpayers at more risk of having to bail out the mortgage market during big declines.

The most drastic option would end government backing for home loans beyond the FHA. But the administration warned that this measure could affect access to credit for many potential homeowners. It could boost mortgage rates the most, the officials said, and it could make it harder for community banks to compete in the housing market.

In not offering a single long-term vision for the housing finance system, the administration sought to avoid a contentious clash with Republicans, who often have portrayed the mortgage giants as the chief culprit in the financial crisis. Republicans are likely to agree with the administration's plan to reduce taxpayer support for mortgages over time.

But Rep. Spencer Bachus (R-Ala.), the new chairman of the House Financial Services Committee, said in a statement that while the proposal includes elements that GOP lawmakers have embraced in the past, it "isn't a plan to move us forward, but rather a collection of opinions to consider. What's needed is a real plan, and we intend to sit down with administration officials to find common ground ... we need legislation that protects taxpayers from further losses and future bailouts and builds a stable housing finance system based on private capital."

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Phasing out Freddie Mac, Fannie Mae could boost what other borrowers must pay

Fixed 30-year mortgage rates in the 5 percent range? Minimum down payments below 5 percent? Jumbo-size home loans for high-cost markets at regular interest rates? Kiss them good-bye - possibly sooner than you might guess.

Take a snapshot of today's mortgage market conditions and frame it, because it's highly likely you'll never see anything like these favorable combinations of rates and terms again. That's the inescapable conclusion emerging from the Obama administration's "white paper" on optional remedies for the two ailing giants of housing finance, Fannie Mae and Freddie Mac, along with events already underway in the national economy.

The administration's long-delayed housing report, released Feb. 11, drew a mix of catcalls and mild applause. Apartment developers praised the report's emphasis on expanding opportunities for people to rent their housing as opposed to the idea that homeownership is for everybody.

Big banks and their allies in Congress welcomed the prospect that Fannie Mae and Freddie Mac, who together account for about 60 percent of the mortgage market but have cost taxpayers a net $150 billion in bailout money in the past three years, will be heading into oblivion.

Consumer and real estate industry groups lamented the phaseout of Fannie and Freddie, which supplied steady streams of mortgage money for decades despite their recent crashes.

The report offers not only options for Congress to consider in winding down the two companies but also recommendations on more immediate "transition" measures to achieve a smaller federal footprint in the mortgage market. Some of these transitional steps require no congressional approval and therefore are likely to affect borrowers and homebuyers in the months ahead. Factor these changes into your timing for any loan application or purchase you're contemplating this year:

l Higher insurance fees on FHA mortgages - another quarter of a percentage point on annual premiums. That's vitally important to people with moderate incomes and assets, especially in the African American and Hispanic communities, where FHA loans are the dominant route to homeownership. The report also hints at a possible increase in minimum down payments for FHA, currently just 3.5 percent, but provides no specifics. Any change would require congressional approval.

l Significant reductions in maximum loan amounts later this year for FHA and conventional loans eligible for purchase by Fannie or Freddie, unless Congress votes to retain the current statutory $729,750 limit for high-cost areas before it expires Oct. 1. Loans above each local market's limit - whatever the reduced ceiling turns out to be - will be considered jumbos and come with higher interest rates from private lenders.

l Raising the fees Fannie Mae and Freddie Mac charge lenders to guarantee pools of their mortgages for resale to bond investors. Lenders will automatically pass those on to borrowers as a cost of doing business. The report also calls for raising down-payment requirements at Fannie Mae and Freddie Mac to 10 percent.

l Retaining the controversial and costly add-on fees now charged by Fannie Mae and Freddie Mac that can increase the expense of obtaining even a moderate-size mortgage by thousands of dollars.

These add-ons now extend to applicants with FICO credit scores of 800 and above who are making substantial down payments. The white paper actually applauded the imposition of these fees, calling them one of several "first steps" on the path to weaning consumers off reliance on Fannie and Freddie for mortgage money.

The administration wants to not only wind down the two companies over the coming several years but also severely reduce the size of FHA's role, cutting its market share from about 30 percent to as low as 10 percent. Where will the buyers who depend upon FHA today for affordable financing turn when that sharp cut has been accomplished? That's not clear.

The white paper makes an oblique reference to a major issue bubbling on the back burner that could also push rates up: Regulators are debating what should and shouldn't be a "qualified residential mortgage" under the terms of last year's financial reform legislation. Loans that are not "qualified," in terms of down payment size and other criteria, will require extra investments by lenders when they pool them into bonds. That could raise rates for nonqualified mortgages by as much as three percentage points.

Among the proposals: Make 20 percent to 30 percent down payments the minimum to meet the "qualified" test.

The worst-case scenario: If you only have enough money for a small down payment, you'll be charged significantly higher rates.

Bottom line: Get ready to pay more for mortgages, no matter what ultimately happens to Fannie and Freddie.

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