I have written over the past year about the (pending) “doom”/ shrinking of Fannie Mae and Freddie Mac. Thus far, it is has not happened, or really begun. However, it appears the legislative and social climate is now ready for such an endeavor. As I write, news from just last week has surfaced that Fannie Mae is now asking for another $8 billion (give or take) from the taxpayers to cover recent losses. This is on top of repeated similar requests from the past 3 years. Considering that we are merely weeks away from the federal “Super Committee” bringing about $150+ billion per Year in budget cuts, I just don’t see how Fannie and Freddie can get away without having their operating budgets cut- let alone be increased as per the GSE’s wishes/ needs.
Case in point is the recent congressional bill introduced which aims at reducing Fannie and Freddie and their national loan market share by about 10% each year for the next 10 years. In effect, this is a systematic and gradual dismantling of the Feds direct involvement with our residential mortgage market. It is unlikely that this bill will become law, but the discussions that will ensue from it will likely increase, not decrease, the speed of the overall goals of limiting Fannie and Freddie exposure.
Of course the private market will have to step up to fill this lending void. Wall Street firms will need to establish more vibrant secondary markets, and depository lenders will likely need to expand their portfolio mortgage business. Is this all feasible?
It will be difficult, but I say- Yes. In general, most of Wall Street has done relatively well over the past few years. The big banks have plenty in reserves. What are they doing with it, except just sitting on it? Nothing. There is nothing “safe” out there that will return any reasonable return, with the existing interest rate climate. Thus, it would seem they would be more willing to dole out housing loans and keep these mortgages in house. Even at a 4.50% mortgage rate.
Many people want the U.S. to be more like other nations. If that be the case, then it only makes rational sense for the federal government (read: we taxpayers) to step away from direct loan guarantees in the mortgage industry. We will always have some involvement, and those details are being worked out. However, there are many examples out there to borrow from. Look at the U.K., Canada, Australia, and some of the European countries.
For borrowers and realtors, this is a short term negative as removing a government “subsidy” will naturally increase credit costs/ loan rates. This will hinder a badly struggling housing recovery. But, with the overall economic requirements in D.C, I don’t see much of an alternative. If all agree we need to get our “house” in order, then part of that means we need to get out of each other’s houses.