Finally, A Sensible Solution to Ensure Affordable Mortgage Rates

Published: July 20, 2011
By: John Feehery
2Comments

Many pundits and policymakers insouciantly throw around the idea that Congress ought to get rid of Fannie Mae and Freddie Mac. Sure, Fannie and Freddie have their fair share of warts — they became insolvent after buying bundles of loans, including exotic, high-risk, and undocumented mortgages that helped stimulate the housing crisis. But getting rid of them could have a devastating impact on housing prices and home ownership in the country.

Many pundits and policymakers insouciantly throw around the idea that Congress ought to get rid of Fannie Mae and Freddie Mac. Sure, Fannie and Freddie have their fair share of warts — they became insolvent after buying bundles of loans, including exotic, high-risk, and undocumented mortgages that helped stimulate the housing crisis. But getting rid of them could have a devastating impact on housing prices and home ownership in the country.

The reason? Fannie and Freddie, along with FHA, have an overwhelming presence in the housing marketplace — they guarantee about 90% of all home loans.

The two entities work behind the scenes to help keep your interest rate payments lower than they might otherwise have been by buying mortgages from primary lenders, such as your local bank. This is called the secondary mortgage market, and the system provides capital to your local bank so it can offer mortgages at lower costs to more qualified buyers.

So it isn’t realistic to talk about closing down Fannie and Freddie. Now is the time for somebody to come up with a real solution.

Somebody has. Reps. Gary Miller (R-Calif.) and Carolyn McCarthy (D-N.Y.) introduced bipartisan legislation earlier this month to replace Freddie and Fannie. Called the Secondary Market Facility for Residential Mortgage Act of 2011 (H.R. 2413), the bill offers a comprehensive strategy for reforming the secondary mortgage market and provides the federal government with a continued role to ensure a consistent flow of mortgage credit in all markets and all economic conditions — good and bad.

That’s important. Although private lenders are necessary for a healthy market, having private capital — i.e., Wall Street — as the sole source of housing finance could result in a system dominated by a few large banks that are “too big to fail” at the expense of consumers. And without a federally backed system, banks could withdraw from the market in tough times, like they did during the housing crisis.

Unlike the two organizations today, the proposed entity would have no shareholders. Some groups, like the NATIONAL ASSOCIATION OF REALTORS®, believe having shareholders pushed Fannie and Freddie to overreach for growth and dividends.

Finally, the proposal spells out plans to protect taxpayers and ensure safety and soundness through appropriate regulation and underwriting standards.

This bill isn’t perfect, but it’s an honest and bipartisan effort to stabilize the housing market and help get our economy moving again. And for that reason, I think the two sponsors deserve a round of applause.

What do you think of this proposed plan for replacing Fannie Mae and Freddie Mac?

John Feehery

is a Republican strategist and political analyst for CNN, MSNBC, and Fox News. He’s president of QGA Communications, chief blogger for The Feehery Theory, and a regular contributor to Politico, CNN.com, and The Hill’s “Pundits Blog.”

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Thank you for your comments. We understand that there are multiple points of view on this topic. Agreed. A return to sound lending standards is long overdue. We think that down payments are important, but not the only arbiter of creditworthiness. Sound underwriting combined with credit and employment history — which help ensure a borrower’s ability to repay — are responsible ways to evaluate candidates for loans. The 20% rule would hurt existing home owners and be a drag on the economy by further depressing the housing market. While growth in the housing market is undeniably good for NAR, it's also good for the broader economy. Like you, we're advocates for responsible home ownership.
Posted by HouseLogic on August 02, 2011

To start with there is no right that we get 1-3% down loans to buy a home. I have no issue at all with higher down payments and the restriction on equity loans. Way over due. The NAR is dead wrong on this issue. The 20% might keep allot of people from walking away from their loan commitments having skin in the game. This issue is just self serving for the NAR. Keep the market greased with taxpayer’s money. We need the feds OUT of the business of protecting the real estate industry with all the non recourse loans that the two federal agency hands out. It will be interesting if the NAR allows my post to post. George Young Matthews, NC
Posted by George on August 01, 2011