The crisis of the housing bubble can be seen throughout the country. Foreclosures in Michigan, short sales in Wisconsin, and bank-owned homes in Indiana. There seems to be no state that is free from the foreclosure mess. But is the answer to the problem simply shutting down the mortgage giants? Fannie Mae and Freddie Mac? That seems to be the plan of the federal government. It’s a goal House Republicans share with President Obama.
How does this affect me?
Closing Fannie and Freddie would likely spell the end of something that is part of the American way of life: the 30-year fixed-rate mortgage. Real estate experts from both political parties agree that interest rates would likely rise for most borrowers. Plus, standard practices like locking in an interest rate could become something homebuyers pay for out of pocket.
Why is the government doing this?
Are the Feds Trying to Ruin the American Dream of Owning a Home? It’s unlikely that the government simply wants to cause trouble for first-time homebuyers, other borrowers, and the real estate industry. But your actions will likely do just that.
Mark Jones, president of AmeriFirst Home Mortgage, recently gave me insight into the reasons and consequences of this latest move in the mortgage industry.
Most of the things the government is trying to do about housing finance is based on the premise that the entire industry was broken and that’s what caused the collapse. There is now a huge push by politicians to overcompensate with regulation and change to show their constituents how tough they are.
The facts are that the industry functioned well and without intervention from the federal government until the traditional credit standards that were used for decades were abandoned. Easy credit standards fueled by Wall Street’s insatiable appetite for high yield, and Fannie Mae/Freddie Mac’s tacit endorsement of these relaxed new standards created a bubble that is now an epic binge from which we are still suffering a long hangover. .
However, the products that created the nightmare are now gone and our industry is underwriting loans the way we have traditionally done. The book of business closed in the last two and a half years is doing amazingly well and all the players who made a living in the Sub-prime and Alt A world are gone.
Instead of over-regulating our industry and reducing the government’s commitment to housing by closing Fannie Mae/Freddie Mac and reducing HUD’s role, I believe the government should focus on products with lax credit standards and unfriendly terms for the consumer. In other words, let’s fix what caused the problem and not destroy all industry and homeownership along with it.
If government needs a model of what works, it need look no further than the Department of Housing and Urban Development (HUD) and specifically Ginnie Mae (GNMA- Government National Mortgage Association).
In simple terms, Ginnie Mae does for FHA, VA, and USDA loans what Fannie Mae and Freddie Mac do for conventional loans by providing a secondary market for “government loans.” Ginnie Mae for the last two fiscal years has made a PROFIT of over ½ billion each year.
Imagine, a government agency that actually sends surplus funds (which is what they call it in their annual report to congress… I guess the P-word is bad news in government) to the Treasury. The reason this has worked for Ginne Mae while Fannie/Freddie are hemorrhaging cash is because the credit standards of the loans Ginnie Mae provides liquidity for NEVER CHANGED.
The industry never broke; he just went crazy for several years.
your takeaway
If the government gets its way, the standard of borrowing Americans are accustomed to could be drawing its last breath for years to come. But instead of just killing Fannie/Freddie, the feds should be looking at other symptoms of the housing bubble catastrophe.