It’s been an interesting week with President Obama calling for an end to Freddie Mac and Fannie Mae as well as the Justice Department filing charges against Bank of America.
Unfortunately, closing Freddie Mac and Fannie Mae will probably lead to higher interest rates. Freddie Mac and Fannie Mae own or guarantee almost half of all existing mortgages and 90% of the new ones being written.
“For too long these companies were allowed to make huge profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag. It was ‘heads we win, tails you lose,’ and it was wrong,” Obama said. “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.”
USA Today reported:
The idea behind both plans is to shift more mortgage financing risk from the government to the private sector to prevent taxpayers from having to pay for future bailouts. But there’s a price homebuyers would likely pay for having private investors shoulder more risk to protect taxpayers.
“It will mean higher mortgage rates,” said Mark Zandi, chief economist at Moody’s Analytics. “The question is how much higher.”
Typical borrowers could pay about $75 per month in extra interest payments, about half a percentage point, on an average mortgage under the Senate proposal, Zandi estimated, and about $135 more under the House plan. That’s on a conforming loan of about $200,000 with the borrower providing a 20 percent down payment.
Bloomberg News had concerns that some of the president’s ideas could lead to another financial mess:
Many of the president’s goals are smart steps along the path of reform. Private lenders should have to deal with the consequences of their own bad decisions without dumping them on taxpayers. It should be easier for borrowers who are current on their loans to refinance at today’s relatively low mortgage rates. And government policy shouldn’t favor homeownership over renting, now that it’s clear renting is the better option for millions of households.
Some of Obama’s other ideas are worrisome. It’s all well and good to say that the government should “cut red tape” and “simplify overlapping regulations” so that “responsible families” have an easier time buying homes. But what does this mean in practice? Should income and down-payment requirements be eased? Lest we forget, lowering lending standards was precisely what got us into the housing mess in the previous decade.
In his speech, Obama sketched out a sensible plan for limiting taxpayers’ exposure. What he still needs is a strategy for setting minimum standards for the kinds of mortgages that can be packaged into securities by Wall Street banks.
Also in the Wall Street Journal was a report that the Justice Department and the SEC both filed lawsuits against Bank of America for fraudulent practices:
The Department of Justice and Securities and Exchange Commission filed parallel civil actions in federal court in North Carolina alleging that the second-largest U.S. bank by assets understated the risks associated with mortgage-backed securities in 2008.
A Bank of America spokesman said the securities in the case soured because the housing market collapsed, which wasn’t the fault of the bank.
Tuesday’s complaints, however, show that regulators and government investigators still are working through a backlog of cases focused on banks’ actions during the housing downturn and financial crisis.
In Tuesday’s complaint, the Justice Department alleges that the bank didn’t comply with its own internal underwriting standards when it sold the loans to investors. In total, more than 40% of the 1,191 mortgages didn’t comply with the bank’s standards, the government said.
With increasing interest rates, now is a great time for both first-time homebuyers and homeowners to take advantage of the current low interest rates. Talk to a reputable mortgage loan officer. A good loan officer will diligently monitor interest rates for their clients, and industry trends that may impact which loans are best for you.