Mortgage Finance Overhaul in 2017?On May 14, 2017 by cassalynne
During his annual State of the Union address earlier this year, President Obama called for a reform of the American mortgage system. While the majority of these demands were reiterations of his previous calls to action on the matter, the address included a sense of urgency that have many supporters hopeful.
But what are these reforms, and how will they benefit you? And how does it affect the process of acquiring a home loan in places like Mesa, AZ? For the answers, it is first important to understand what created the demands for reform in the first place.
The 2008 Mortgage Crisis Bailout
The crisis arose out of issues with government-run companies Fannie Mae and Freddie Mac taking too many risky bids. Under the business model by which they run, the two giants buy existing mortgages from banks or trade in securities comprised of bundled mortgages over the secondary market. In theory, this allows banks to provide a home equity line of credit to more individuals while keeping expenses low because a third party is purchasing those debts and restoring funds. In practice, the two companies made numerous bad decisions which then caused a backlash on the banks and taxpayers. In the end, Fannie Mae and Freddie Mac withdrew a staggering 187.5 billion dollars in aid from the U.S. Treasury and caused a major financial crisis.
While 185.2 billion of those loans have been paid off and the housing market has recovered, the fear that this incident could be repeated causes concern throughout both the public and private sectors. Any reform must account for the fact that a home equity line of credit is only fair if it is able to preserve access to the 30-year, fixed-rate mortgage policy which has been a major part of providing affordable mortgages to the middle-class. At the same time, the model presented by Fannie and Freddie remains dangerously unstable.
Obama’s Call for Reform
Under the proposed reforms, Obama calls for an end to the housing finance business model which spawned Fannie Mae and Freddie Mac. In their place would be a Federal Mortgage Insurance Corporation, which would serve as a more limited government backstop for private-sector loans. This places the private sector in primary control of mortgages. In addition, Obama seeks a guarantee that the 30-year fixed-rate mortgage and other safe forms of mortgage shall be preserved in the reformed system. Finally, the new reforms must support credit-worthy first time buyers.
The Potential Benefits
If President Obama’s proposed reforms pass through Congress, it shall create several benefits to prospective homeowners. The intent of Fannie and Freddie was to purchase and sell a number of existing loans and securities. Unfortunately, these purchases became increasingly risky and a growing number fell through. By placing the secondary mortgage market in the hands of the private sector with a more restricted government backstop, the cost of failed loans remains with the private sector, not with the taxpayer.
Obtaining a home equity line of credit would not only be possible for credit-worthy first time homeowners, but also to renters. As not everyone wishes to own their homes, the consideration of renting families broadens the number of those eligible to benefit from equity financing. With the continuation of popular options such as the 30-year fixed-rate mortgage, costs are kept affordable in a market where property values are once again on the rise.
The Bottom Line
With a Senate bill already in the works, President Obama has added a sense of urgency to his coverage of the mortgage reform plans. His focus on removing the business model behind Fannie and Freddie seek to prevent another financial crisis. This could potentially make mortgages safe and affordable for both renting and purchasing families.