THE WRONG PATH

Politicians in Washington, D.C., May Make
It Harder to Buy. Let Them Hear From You.

Decisions now being made in Washington, D.C., could have a major impact on your ability to buy a home — and to pay for it.

Saying that the government should extricate itself from the mortgage-guarantee business, federal elected officials have called for everything from diminishing to eliminating Fannie Mae and Freddie Mac, the country’s largest providers of funds for home mortgages.

This comes despite the fact that Fannie recently announced its sixth straight quarterly profit and said it was sending $10.2 billion in dividends to the Treasury Department.

Freddie also reported a substantial profit — $5 billion over the previous three months — and said it is paying $4.4 billion in dividends to the government.

Both companies also outlined the ways in which they’ve helped homeowners following their takeover by the federal government in the wake of the housing market’s collapse in September 2008.

Since January 2009, Fannie has provided funding for 3.1 million home purchases and 11.4 million refinancings. It has also helped 1.3 million borrowers who were heading for foreclosure with loan modifications and workouts.

Fannie has already paid back $95 billion of the $116 billion it borrowed from the government and could return the rest sometime next year. It expects to remain profitable “for the foreseeable future” because of the high quality of its new loans and declining losses on its existing loans.

Freddie, meanwhile, provided funding for 1.8 million home purchases and 7.2 million refinancings while helping 872,000 borrowers with loan modifications or workouts.

As of September it had repaid $41 billion of the $71 billion it received in taxpayer funds. And its 2.8 percent rate of serious delinquencies is far below the mortgage industry average of 6.4 percent.

What would the elimination of Freddie and Fannie mean to homebuyers? That depends on what form this legislation ultimately takes. And given the difficulty of getting anything done in Washington, no one can say with any certainty what’s likely to finally pass the Senate.

However, most agree that Freddie and Fannie will be considerably diminished, if not eliminated, and that private sources will assume more risk when making mortgage loans. That, say housing industry advocates, means tighter standards and higher rates.

Most of the discussion so far centers around the Republican-backed Protecting American Taxpayers and Homeowners (PATH) Act, which came out of the House Financial Services Committee on a straight party-line vote last month.

The National Association of Realtors (NAR) and the National Association of Home Builders (NAHB) oppose the PATH Act because it doesn’t include an explicit federal guarantee for mortgages and goes too far in reforming the Federal Housing Administration (FHA).

Testifying before the House committee prior to the vote, Jerry Howard, NAHB’s CEO, agreed that private capital should be be the dominant source of mortgage credit.

“However, ensuring the safety and stability of the housing finance system cannot be left entirely to the private sector,” Howard said. “The historical record clearly shows that the private sector is not capable of providing a consistent and adequate supply of housing credit without a federal backstop.”

Added NAR President Gary Thomas: “We believe a government guarantee is necessary to create stability in housing finance markets, and to ensure the continued availability of 30-year fixed-rate mortgages for all qualified borrowers — not just those with a high down payment and very high credit score.”

NAHB has recommended that Fannie and Freddie be gradually phased into a private sector oriented system, where the federal government’s support would be limited to catastrophic situations, after private capital and insurance reserves are depleted.

NAHB also urged House lawmakers to modify the sections of the bill outlining changes to the FHA, which would be permitted to insure mortgages only for first-time homebuyers and for low- and middle-income households.

In addition, the FHA would have to reduce its insurance coverage on mortgage loans from the current 100 percent to 50 percent, thereby increasing the risk to private borrowers.

“The PATH Act would drastically diminish FHA’s vital liquidity mission,” said Howard. “By simultaneously leaving all federal support for housing to FHA, and then by greatly reducing the overall scope and reach of FHA’s programs, the PATH Act would greatly limit homeownership and rental housing opportunities for many financially responsible and qualified Americans.”

Howard urged the committee to move forward in a careful, prudent manner to provide needed assurance for the industry and consumers.

“At a time when housing is just starting to get back on its feet and provide job and economic growth, we don’t want to do anything that would reverse this positive momentum,” he said. “It’s definitely important that Congress be mindful of housing’s important role in the economy going forward.”

Mark Zandi, chief economist for Moody’s Analytics, says that if the PATH Act were implemented as written, it would “lead to significantly higher mortgage rates, particularly in tough economic times, and would put 30-year, fixed-rate loans out of reach for most Americans.”

That’s why if you’re considering a home purchase — particularly if you’re a first-time buyer — you need to be paying close attention to this issue.