Will Mortgage Changes Hurt the Housing Industry?
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Will Mortgage Changes Hurt the Housing Industry?

Few people can argue that there is no need for changes in the mortgage industry. But are the changes being proposed by Congress and the government the best way to turn things around?

During the 2008 mortgage and housing crisis, the federal government bailed out Freddie Mac and Fannie Mae – the two largest mortgage backers in the nation. But current proposals by President Obama and the federal government would phase these two companies out and make the private sector assume more of the risk of potential losses when mortgages default and homes get foreclosed on. Is this the reform that is needed? And if it passes, will the housing industry suffer even more than it already has?

There is no question that something has to be done in the mortgage industry. However, the reform that is being discussed would likely lead to increased mortgage rates. The historically low mortgage rates are what helped make the industry experience an upswing in sales as more buyers were willing to buy a home at such a low rate. But once those rates go up, fewer buyers are going to want to buy a home because of the added cost and interest they will have to pay over the course of the loan.

Freddie Mac and Fannie Mae guarantee around half of the mortgages in the country. That equals out to about $5 trillion spread over 31 million homes. But if the current proposals pass through the legislature, buyers would need to come up with a larger down payment before they can even be considered for a home loan. In a time when unemployment is at record highs and the economy is so uncertain, who will want to put up 10 or even 20 percent of a down payment to move into a home? And even if they wanted to, who could afford to do that these days?

According to Mary Tingerthal, the Minnesota Housing Finance Agency commissioner, the current system in which Fannie Mae and Freddie Mac secure mortgages for buyers, is a good system that was abused a in the last several years which led to the mortgage crisis a few years ago. But if that system is dismantled like the federal government is planning to do, it would be bad news for the mortgage industry overall.

Other analysts agree with her. The negative press that Fannie Mae and Freddie Mac has received in the last couple years, however, is going to scare many people away from these two mortgage giants if something is not done. However, as with anything that occurs with the federal government, nothing is going to happen quickly. Members of Congress have discussed the ramifications and the benefits of this mortgage system overhaul but it will likely be weeks or even months before something actually gets voted on. And even then, the changes will probably take months or years before taking effect.

How do you feel about the proposals for reform that are being discussed? Do you think it’s good news for the mortgage industry or will these proposals simply create more problems?

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  • Sol

    March 04, 2011

    The phaseout of Fannie and Freddie will create winners and losers. If you are a homebuyer, then you will be a winner. Higher interest rates will result in lower home prices. I'd rather buy a house at a lower price with a higher mortgage. There are several reasons for this:

    1. Taxes are less on a lower priced home.
    2. Mortgage interest deduction (if not phased out) is higher.
    3. It is always possible to refinance a higher interest loan in the future. It is not possible to change the price at which a house is purchased.

    The losers are existing homeowners who need to equity in their homes to live.

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