December 5, 2023

Mortgages: A Plan to Phase Out Fannie Mae and Freddie Mac

Consumers could see higher borrowing costs in the next year or so, along with a more limited number of financing choices, the experts say, because some of the proposed changes do not require Congressional approval and appear to already be in the works.

“There’s a lot of uncertainty in the process,” said Barry Zigas, the director of housing policy at the Consumer Federation of America, “but you’re probably going to get a better deal on a fixed-rate loan sooner rather than later.”

Mr. Zigas added that the 30-year fixed-rate mortgage — the plain-vanilla option favored by buyers for decades — might become harder to find and more expensive, because without agencies like Fannie and Freddie to buy these loans, banks may be less willing to extend credit at a fixed rate over such a long term.

John Mechem, a spokesman for the Mortgage Bankers Association, agreed with that assessment. “Traditionally,” he explained, “banks have been less willing to keep 30-year fixed-rate mortgages on their balance sheets, so in the absence of a vibrant securitization market, banks would more heavily favor adjustable-rate products.”

The plan, which calls for winding down Fannie and Freddie over the next five to seven years, was drafted by the Treasury Department, the Department of Housing and Urban Development and the White House, and was sent to Congress on Feb. 11. It proposes three options.

The most extensive of these options makes banks and other private lenders responsible for the entire mortgage industry, with the government helping only veterans, rural consumers and the neediest of borrowers.

Another option proposes limited assistance and government guarantees, in the form of borrower-paid fees or taxpayer-financed insurance, for most mortgages, in the event of a financial crisis like the subprime meltdown that began in 2008. The third envisions more government oversight of the mortgage industry and provides investors in home loans with “catastrophic reinsurance” in the event of a crisis.

The phase-out proposal also calls for a more limited role for the Federal Housing Administration, the insurer of low-down-payment mortgages that have grown popular among first-time buyers and those with weak credit or low income. It suggests raising the minimum down payment to 10 percent from 3.5 percent, and imposing that 10 percent minimum for Fannie and Freddie loans. F.H.A. is raising the mortgage insurance premium already — it is set to increase next month, to 1.1 or 1.15 percent of the loan amount for 30-year fixed-rate loans. The agency was considering a jump to 2.25 percent.

The proposal also calls for lowering the size of loans that Fannie Mae and Freddie Mac can insure; the limit, for loans in high-cost areas, is already set to drop, on Oct. 1, to $625,500 from $729,750. Larger, “jumbo” loans typically carry higher rates.

Some of the proposals — like those for lowering loan limits and raising the insurance premium and certain fees on Fannie, Freddie or F.H.A. loans — do not require Congressional approval. As a result, borrowers can expect to see those fees, tacked on to the interest rate of the loan, rise at least a quarter of a percentage point, according to Sarah Rosen Wartell, the executive vice president of the Center for American Progress, a liberal think tank. “This is all but certain in the short term,” she said.

Fannie Mae and Freddie Mac were created after the Depression to help Americans buy homes, but the agencies, buffeted by the mortgage crisis, have received more than $150 billion in taxpayer help. Fannie, Freddie and F.H.A. buy or insure about 97 percent of residential mortgages.

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