Government's Reduced Role in Mortgage Market Could Boost Rates

In a move that could boost interest rates and monthly payments for Fountain Valley homebuyers, the Obama administration proposes to scale back government-supported housing programs such as Fannie Mae and Freddie Mac.

Local realtors like Gary Briggs, president and broker for Pacific City Properties Inc., Fountain Valley, see the scaling back or elimination of Fannie and Freddie as having a huge impact on home sales in the Fountain Valley area. He also sees the potential for another housing crash if middle-class buyers cannot qualify for long-term loans.

Already, Briggs has seen a trend of banks favoring short sale investment buyers over people wanting a home to live in. Loans are much tougher to qualify for, and most bank-owned homes are going to investors.

Briggs believes that after the easy-loan market from about 2001 through 2007, the pendulum has swung back too far the other way. Loss of Fannie and Freddie would make matters much worse, he said. The two programs took a hard hit during the housing crash, and Washington is looking to cut its losses.

The slimming down of Fannie and Freddie could lead to higher overall interest rates as private lenders find themselves better able to compete with government-supported programs.

Although the plan would be phased in over as long as seven years, it provides another good reason not to wait too long in purchasing a home. For now, prices and interest rates remain low.

But that is likely to change. Under the proposed plan, “guarantee fees,” which are paid to mortgage bond holders if the borrower falls behind or defaults on a mortgage, would be raised over several years. The Obama administration proposes raising guarantee fees, which would increase interest rates on loans backed by Fannie Mae and Freddie Mac.

Also, the loan sizes guaranteed by Fannie and Freddie could be reduced. The two programs allow lower interest rates for 30-year fixed-rate mortgages that don’t exceed $417,000. Higher rates apply to loans from $417,000 to $729,750.

Under the proposed plan, the maximum loan amount backed by Fannie and Freddie would drop to $625,000 on Oct. 1. For FHA loans, the maximum could fall to $500,000. The average home price in Fountain Valley stands at about $550,000.

The changes would also affect down payments. Fannie Mae and Freddie Mac usually require a down payment of 5 percent of the home price from borrowers with private mortgage insurance.

Under the proposed plan, the down payment would be raised to at least 10 percent for loans backed by Fannie Mae and Freddie Mac. The FHA could also ask for higher down payments.

Overall, real estate experts say the changes will make it more expensive for borrowers to purchase a home and that would restrict the availability of mortgages. The Obama administration reports that it wants Americans to have access to housing they can afford.

“That does not mean our goal is for all Americans to be homeowners,” an administration report stated.

With $10 trillion in total outstanding home loan debt, the administration felt changes were needed in the home loan market, including the way Fannie Mae and Freddie Mac does business. Delinquencies on home loans backed by Fannie and Freddie have already cost taxpayers more than $150 billion.

While the administration wants to reduce the government’s role in backing home loans, it favors an increase in federal subsidies for rental housing. But for many, the American dream of owning a home, including those in central Orange County, may now be fading.