The KCM Blog - Real
Estate without Freddie and Fannie
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Posted: 13 Aug 2013 04:00 AM
PDT
“The good news is right now there’s a bipartisan group of
senators working to end Fannie and Freddie as we know them. And I support
these kinds of reform efforts.”
- President Obama, August 6th
Ending Freddie
Mac and Fannie Mae will mean two things to the housing industry: higher rates
and probably shorter mortgages. This will result in larger monthly mortgage
payments.
Fannie Mae and Freddie Mac are
government run agencies that have propped up a troubled real estate market
over the last several years. The agencies always had a place within the
mortgage sector but over the past several years have been involved in over 90%
of new mortgage originations. As they wind down this involvement, the
mortgage space may change dramatically.
David Stevens, CEO of the Mortgage
Bankers Association and a former Obama administration housing official,
in a recent AP article explains what will be the result of winding down
Fannie and Freddie:
“You have to assume that
almost in any future model being drafted, loans will be more expensive.”
This will be felt in two ways.
Higher Interest Rates
In the same AP article, Mark Zandi, chief economist at Moody’s
Analytics, reveals:
“It will mean higher mortgage
rates. The question is how much higher.”
According to Zandi, borrowers
could pay about ½ point higher in interest rate ($75-$135 extra in interest
payments per month to the average purchaser on a $200,000 loan).
Why a projected increase in
rates? The average 30 year mortgage rate over the last three decades is
8.69%. From 2003-2008, it was 6.06%. Part of the government’s stimulus
program was spent on keeping mortgage rates low while the economy recovered.
Many think that rates will return to the 6-6.5 range should Fannie and
Freddie cease operations.
Shorter Loan Terms
Once Freddie and Fannie no
longer exist, the question becomes whether or not the private sector will any
longer feel comfortable issuing a fixed rate loan for 30 years. In Canada,
for example, they don’t even have 30 year fix rate mortgages available. The
vast majority of Canadian home loans have a 25 year payout with the interest
rate being renegotiated every five years. If rates go down, the borrower will
wind up with a lower rate. If rates go up, the borrower ends up paying a
higher rate. If you want a fixed rate mortgage for 25 years you pay a rate
approximately two percentage points higher than the going rate at the time of
your closing.
Some believe that the private
sector will no longer make the 30 year mortgage option available for at least
a portion of borrowers.
Bottom Line
It will be interesting to see
how the winding down of the two agencies impacts the housing market going
forward.
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