Mortgage rates have been falling: What could go wrong?
Mortgage rates have been falling lately, and that’s a good thing for many. But higher mortgage rates could be in the offing.
Recently, officials at government-controlled Fannie Mae and Freddie Mac requested a multi-billion dollar bailout. This sparked calls to kick them back into the private sector or raise the fees they charge. These changes could easily affect consumers.Verify your new rate (Jan 26th, 2020)
How Fannie and Freddie work
Fannie Mae and Freddie Mac make up much of the “secondary market.” This is the electronic arena where mortgages are bought and sold. In basic terms, your local lender might originate 100 mortgages with an average value of $200,000.
These mortgages – worth a total $20 million at face value – can be sold on the secondary market. If they meet Fannie Mae and Freddie Mac standards, Fannie Mae and Freddie Mac will purchase them. As a result of the sale, the lender has the money to make more loans.
The market crash
In 2008, with home values falling nationwide, the mortgage giants required bailouts from the government, and they got them. The US Treasury purchased $100 million of their preferred stock and mortgage-backed securities.
And the government sought to reassure the public. So it took over both companies with a “conservatorship.” Keeping the two afloat cost taxpayers $187 billion over time. Treasury paid $116 billion for Fannie and $71 billion for Freddie.
In August 2012, the Treasury routed all Fannie and Freddie profits into the general fund. Today, the bailout has been paid back with over $58 billion in profit. As of October 2018, Fannie paid $147 billion and Freddie paid $98 billion.
However, Fannie Mae and Freddie Mac were back in the news requesting additional funds. Fannie Mae says it will need to draw $3.7 billion from the U.S. Treasury in March to keep its net worth from going negative, the result of tax changes and not their essential business profitability.
But that request has spooked some in Congress and the Administration, and their reaction may not be great for consumers.
Congress and higher mortgage rates
The big question is what happens next with Fannie Mae and Freddie Mac. Besides the worry that a change will lead to higher mortgage rates, there is also concern that there will be less affordability. The concern for property is owners is that higher mortgage rates can mean fewer home sales and weaker prices.
The thought that Fannie Mae and Freddie Mac charges can go up – and with them mortgage rates – is real. In a December 2018 report, the Congressional Budget Office (CBO) said the government could force Fannie Mae and Freddie Mac to raise their fees in 2019 and 2021.
And who would get the billions in new revenue generated by the mortgage rate hikes? The federal government.
Are higher mortgage rates better for borrowers?
President Trump has nominated Mark Calabria to head the Federal Housing Finance Agency. Calabria would regulate Fannie Mae and Freddie Mac.
How might Calabria change the lending system?
In 2016, he said, “The primary barrier is the high price of housing relative to income. Rather than continuing to substitute easy credit for a lack of income growth, the better path would be to address both income growth (or lack thereof) and housing price growth directly.”
Calabria, says Barron’s, believes “The government should not subsidize mortgage credit because that doesn’t make housing more affordable. He rightly notes that smaller down payments and lower interest rates make it easier to spend more money on housing, which, in the absence of additional construction, simply raises prices.”
Close Fannie Mae and Freddie Mac
Alternatively, the government could sell off the two companies or let them become private enterprises. This would net their shareholders (or the government, depending on how the transition is structured) big money. Shares have gone up recently as some anticipate this possibility.
“Fannie Mae and Freddie Mac are highly profitable and, in the open market, would be worth hundreds of billions of dollars,” according to author and columnist Jim Glassman.
“Although many in Treasury considered the common stock of the mortgage funders worthless in the depths of the crisis, the government’s stake now represents the largest commitment fee in financial history.”
Maybe replacement firms can borrow money as cheaply as Fannie Mae and Freddie Mac, but maybe not. A second question is whether lenders will pay more for services. That would mean higher mortgage rates.
What can you do about changes and possible higher rates?
Since the public has no control over the decision to increase costs or get rid of Fannie and Freddie, what can you, the mortgage borrower do?
- If fees go up, don’t assume that these government-administered loans are the best deal in town. They often used to be, but that may change. Shop for your mortgage with a variety of lenders, including non-conforming providers (private lenders that don’t sell loans to Fannie or Freddie)
- If Fannie Mae and Freddie Mac are cut loose, there may be major repercussions. Currently, their loans are considered “qualified mortgages” by the US government, and lenders who make these safer loans enjoy special protection if borrowers default. If that protection goes away, increased costs can result
- Without government conservatorship, Fannie Mae and Freddie Mac may be able to establish more liberal underwriting guidelines and offer more creative products. That may cause increased competition with so-called portfolio lenders and bring pricing down for those products
- Shop aggressively. Because privatization, according to researchers Benjamin E. Hermalin and Dwight M. Jaffee (in the HUD study Examining the pros and Cons of GFE Privatization), “would create winners and losers.” However, they predict that the overall impact would be positive.
What are today’s mortgage rates?
Current mortgage rates have dropped significantly, creating an opportunity for anyone planning to buy a home soon, or perhaps a refinancing chance for those with rates over 4.75 percent. It would probably behoove anyone in that position to check rates now and move their timetable forward.Verify your new rate (Jan 26th, 2020)