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Succumbing to earnings pressures, 30-year mortgages may see decline
There’s been rumors going on for a few years about the federal government closing Freddie Mac and Fannie Mae. Although these GSEs were bailed out after the housing meltdown, they’ve since paid back the nearly $190 billion loan, plus an additional $40 billion. Despite the GSEs earning a combined $1.5 billion in the fourth quarter and $21.9 billion for the year, their earnings have been anemic compared to earnings from the past.
Now economists and mortgage industry professionals are discussing a possible future without Fannie Mae and Freddie Mac, and although their futures seem dim, they’re still adding to their service and program mix. Fannie Mae recently introduced Collateral Underwriter, its valuations review program and Freddie Mac is following up with its own version sometime in March. Also Fannie Mae and Freddie Mac are set to roll out three percent down loan products, which could help increase homeownership with lower and middle-class consumers. If the GSEs fold, one mortgage market analyst believes it could change the consumer mortgage market in a big way.
Dick Bove, Bank Analyst asks, “Is the United States ready to take a shock to housing prices because we’re getting rid of 30-year fixed rate mortgages?”
Banking executives privately told Bove that they cannot make money on 30-year fixed-rate home loans anymore because of new rules on capital reserves and securitizing mortgages; Bove posits that the U.S. Treasury Department has a goal of phasing out Freddie Mac and Fannie Mae by 2018. He said that banks are more than willing to offer residential mortgages with much shorter durations between five and ten years. But with the GSEs being the biggest buyers of 30-year mortgages, this would effectively drive up home-buying costs, making the American dream unattainable for lower and middle-class consumers.
Jeff Taylor, Managing Director at independent mortgage processor Digital Risk, also agree that a demise of the GSEs would lead to shorter and more expensive mortgages. Taylor finds it hard to believe that banks would want to hold a note for 30 years in this rate environment.
“30-year mortgages are harder to hedge against,” he says. “In a different rate environment, maybe the scenario would be different, but for now there would be no incentive to keep offering 30-years as an option.”
Victor Lund, a partner with WAV Group Consulting, said “Bove is correct that the current federal strategy being discussed is the restructuring and possibly the wind-down of Fannie and Freddie. There is also strategic discussion about the mortgage rate interest tax deduction. Let’s face it, homeowners are rarely homeowners in America today. The banks own the property by virtue of their financing arrangement.”
Lund adds that shorter home loans might be a recipe for an economic disaster.
“The loss of the 30-year fixed mortgage would put homeownership financing out of reach for millions of American Families,” he says. “For the market to correct, home prices would need to drop dramatically to become affordable. And another significant drop in housing values would create another financial crisis.”
Some don’t think that dismantling Freddie and Fannie would signal the end of homeownership for low and middle-income consumers, thinking Bove’s statements are premature.
David Bakke said, “There has been talk of the death of the 30-year fixed rate house loan for years, and the comments from Dick Bove simply fueled those flames. Personally, I don’t see that particular mortgage product going anywhere any time soon. I think what you would see instead is banks improving their underwriting procedures and possibly starting to requiring [sic] a larger down payment in order to decrease their risk on those mortgages.”
Pittsburgh Tribune. Easier home loan rules worry some