Friday, August 9, 2013

The End of Fannie Mae and Freddie Mac as We Know Them

President Obama and the U.S. House and Senate are finally in agreement about one thing: the Federal government needs to get out of the mortgage business. Fannie Mae and Freddie Mac are quasi-governmental agencies that buy bundled mortgages from mortgage lenders. This not only frees up the mortgage lenders' funds so they can continue to make mortgages, but as we saw in the housing market collapse, it freed the mortgage lenders of responsibility for the bad loans they made. The tax payers were left holding the enormous bag full of stinking, unethical mortgages.

Now mortgage lending practices have tightened up because Fannie and Freddie will not buy any mortgage with a whiff of impropriety. In fact, Fannie and Freddie now make mortgage lenders buy back mortgages, even mortgages that are not delinquent, if Fannie or Freddie suspects the mortgages were made fraudulently. So the mortgages lenders now walk on eggshells, ever learning new lending requirements. Even the most respectable borrowers have a hard time getting a mortgage.

The Senate plans to reduce government's role in the mortgage industry, and no surprise, the House wants to go much further to almost eliminate it. USA Today reports that interest rates will be higher on mortgages without government backing. On a typical $200,000 mortgage with 20% down, a borrower would pay an extra $75 per month under the Senate plan, or an extra $135 per month under the House plan.

Ironically, now that Fannie and Freddie's lending criteria are really strict, both agencies are extremely profitable. They have already repaid $132 billion to the U.S. Treasury, which is more than two-thirds of what they received in the bailout.   

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