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Fannie and Freddie Going Away

Posted on February 17, 2011 by tim in Buying, FHA, Market Update, Mortgage

Two years in the making — the federal government will be reducing their involvement in the mortgage market. Both Fannie Mae and Freddie Mac will wind down within as little as five years.

Today Fannie, Freddie, FHA, VA, USDA and the Federal Home Loan Banks control about 90% of the mortgage industry. In five years the plan is for it to be something under a 20 percent share.

Unfortunately, some of the steps in-between could be troublesome for future buyers who don’t have large down payments and assets. The administration’s strategy is basically to make Fannie, Freddie, FHA and the others progressively less attractive to homebuyers by raising their prices, making underwriting requirements stricter, and lowering their overall availability.

One of the small steps along the way that could affect home sales and financing in the close months ahead are to slash FHA loans by as much as two thirds, which currently have approximately a 30 percent share of the home purchase market nationally, and double that for first-time homebuyers. This will allow the agency to revert to its “historic” average market share of 10 to 15 percent. In order to make that happen, FHA intends to raise its annual MIP (mortgage insurance premium) by a quarter of 1 percent this year. That’s on top of premium increases last year, plus an expected decrease in maximum seller contributions to 3 percent of the loan amount, as opposed to the traditional 6 percent. Next on the agenda would be to cut FHA’s maximum loan size, and increase the current low 3.5 percent minimum down payment to five percent, although this is not definite.

In regards to Fannie and Freddie the administration has a list of short-term changes, including lowering conforming loan limits, increasing down-payment minimums (possibly10 percent), and higher guarantee fees for lenders. All of these will increase costs for homebuyers and make Fannie and Freddie less significant sources of mortgage money.

With that said, where will consumers go for financing as these changes take place? The theory is that the private sector — mainly the big four banks — will step in. However, will the offerings and pricing to people who can’t make 5 or 10 percent down payments be anything like what homebuyers can obtain today through Fannie, Freddie or FHA? Some doubt they will, but only time will tell!


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