Don’t ever take a fence down until you know why it was put up.
Government sponsored enterprises (GSE’s) Freddie Mac and Fannie Mae are in danger of being nonexistent institutions, due to Barack Obama calling for the demise. He is quoted as stating it’s “to bring private capital back into the mortgage market.” Having been established since the Great Depression, these two entities were began to aid bank lenders. Being able to come to Freddie or Fannie to sell their mortgages meant they could receive the cash equivalent of the loan directly, build back their net worth, and in turn be able to give out more loans. The two mortgage supernovas also offered an opportunity for large institutions to invest in hundreds to thousands of loans at once. Unfortunately, this well intended design not only collapsed during the Great depression, but also only a few years ago. In order to avoid the loss of the entire housing market, the federal government had to make good on their promise of protection against default and this promise came at taxpayer’s expense.
Fast forward to present day, Freddie and Fannie are finally back on their feet and looking to make a full recovery and the President wants to end them all together. Frankly, it just isn’t as easy as that. There are important questions to be answered before anyone should say if this idea is the way to go or not. These two institutions were created for a reason. There was a specific design to why they were needed. The effects on private home buying need to be addressed as well as who will fund these 30+ year loans with low interest rates if the major investors pull out of purchasing these types of loans. Could personal banks really lend over all this money to only a few loans and still be expected to have enough capital to enter into more mortgage loans? Would the long term lending agreements, as we know them, become a thing of the past? Is that really a wise move to make in this ever shaky economy?
When you break it down between typical lenders and hard money lenders, it’s easy to see how much a home buyer would be affected. While typical home loans only require a small amount of equity and maintain reasonable interest rates, an investment lender can require equity as high as 35% or more. Also, their interest rates seem to run fairly high from 5 to 10 percent (with 20% down payments). These are not stipulations most home buyers are able to contend with. Without secondary investors, where will this leave the buyer and the housing market? Obviously, lending would almost definitely cease to exist. Those few individuals financially secure enough to handle these rates would be hit with not only much larger down payments, but also higher borrow cost.
This would definitely be a hard hit for real estate agents, lenders, investors, home builders and several others. Even if the GSE’s were to disappear, some other type of conglomerate would have to be founded to shoulder the market functions that Freddie and Fannie were designed to do all that time ago.
However it may be developed, one thing is for certain; the most productive outcome will be brought forth by a bipartisan agreement. Conservatives will need to be happy with being out from under the government’s thumb and into a private investment situation, while the liberals will need the comfort of some of the older promises (i.e.: the stimulation of lending to underprivileged communities and minorities). This all sounds well and good on paper, but would we really be able to convince those corporations with the type of capital it would take to make this work, that it is indeed a safe move on their part? It’s really not easy to predict where this would leave us.
The fence is there for a reason. We should know exactly what lies beyond it before we start to tear it down.