Nine out of ten mortgages in the U.S. are currently guaranteed by the government. Private capital has yet to return, which under normal market conditions should be the primary source of residential mortgage financing.
A recent report from the White House Administration to Congress provides a plan to reform the mortgage market. The plan is to wind down Fannie Mae and Freddie Mac and reduce the government's footprint in the mortgage business. Also included are reforms for stronger consumer protection, more protection for investors, stricter underwriting guidelines.
What does the plan include?
Wind Down Fannie Mae & Freddie Mac
The report recommends new policies to wind down Fannie Mae and Freddie Mac, and bring private investors back to the mortgage market. Government support will be withdrawn at a pace that does not undermine the recovery of the housing market.
Raise Mortgage Rates
The report recommends ending advantages that Fannie Mae and Freddie Mac currently have by requiring them to price mortgages the same as private banks or financial institutions, so as to level the playing field for private investment.
3. Reduce Exposure to Large Loans
To reduce exposure to loss, the plan recommends that Congress reset the temporary increase in Fannie Mae and Freddie Mac conforming loan limits to the levels set in the Housing and Economic Recovery Act.
Bigger Down Payments
The plan suggests bigger down payments from borrowers when buying a home. Increasing required down payments reduces risk so that any mortgage that Fannie Mae and Freddie Mac guarantee will have a minimum 10% down payment.
5. Reduce Portfolio of Loans
The report says continue to reduce Fannie Mae and Freddie Mac's investment portfolio at an annual rate of no less than 10% per year.
Make FHA Loans Cost More
The plan calls for Congress to let the temporary increase in FHA conforming loan limits to expire. The Administration will also put in place a 25 basis point increase in the price of FHA's annual mortgage insurance premium, and consider options such as lowering the maximum loan-to-value for qualifying mortgages.
Regulate Mortgage Securities
The plan calls for rules to set stricter disclosure requirements so that investors can more easily understand the underlying risks of securities, and establishing an Office of Credit Ratings to more effectively regulate the credit rating agencies.
Strengthen the Mortgage Market
The report recommends stronger capital standards to help ensure that banks can better withstand future downturns, declines in home prices and other sudden shocks, without jeopardizing the health of the economy, and the strengthened oversight of financial stability.
How Will Reforms Affect Consumers?
How would these reforms affect consumers? Buying a home would require a larger down payment and will cost more in the form of higher mortgage rates and insurance. Refinancing a home would also cost more for the same reasons. Qualifying for a home loan would become more difficult because of stricter underwriting guidelines for loan approval.
A recent report from the White House Administration to Congress provides a plan to reform the mortgage market. The plan is to wind down Fannie Mae and Freddie Mac and reduce the government's footprint in the mortgage business. Also included are reforms for stronger consumer protection, more protection for investors, stricter underwriting guidelines.
What does the plan include?
Wind Down Fannie Mae & Freddie Mac
The report recommends new policies to wind down Fannie Mae and Freddie Mac, and bring private investors back to the mortgage market. Government support will be withdrawn at a pace that does not undermine the recovery of the housing market.
Raise Mortgage Rates
The report recommends ending advantages that Fannie Mae and Freddie Mac currently have by requiring them to price mortgages the same as private banks or financial institutions, so as to level the playing field for private investment.
3. Reduce Exposure to Large Loans
To reduce exposure to loss, the plan recommends that Congress reset the temporary increase in Fannie Mae and Freddie Mac conforming loan limits to the levels set in the Housing and Economic Recovery Act.
Bigger Down Payments
The plan suggests bigger down payments from borrowers when buying a home. Increasing required down payments reduces risk so that any mortgage that Fannie Mae and Freddie Mac guarantee will have a minimum 10% down payment.
5. Reduce Portfolio of Loans
The report says continue to reduce Fannie Mae and Freddie Mac's investment portfolio at an annual rate of no less than 10% per year.
Make FHA Loans Cost More
The plan calls for Congress to let the temporary increase in FHA conforming loan limits to expire. The Administration will also put in place a 25 basis point increase in the price of FHA's annual mortgage insurance premium, and consider options such as lowering the maximum loan-to-value for qualifying mortgages.
Regulate Mortgage Securities
The plan calls for rules to set stricter disclosure requirements so that investors can more easily understand the underlying risks of securities, and establishing an Office of Credit Ratings to more effectively regulate the credit rating agencies.
Strengthen the Mortgage Market
The report recommends stronger capital standards to help ensure that banks can better withstand future downturns, declines in home prices and other sudden shocks, without jeopardizing the health of the economy, and the strengthened oversight of financial stability.
How Will Reforms Affect Consumers?
How would these reforms affect consumers? Buying a home would require a larger down payment and will cost more in the form of higher mortgage rates and insurance. Refinancing a home would also cost more for the same reasons. Qualifying for a home loan would become more difficult because of stricter underwriting guidelines for loan approval.
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