Capitol Hill has been abuzz about the future of mortgage giants Fannie Mae and Freddie Mac since the Government Sponsored Enterprises (GSE) spurred America's recent mortgage meltdown and housing market crash. A Treasury Department white paper on the subject proposed three options for Fannie Mae and Freddie Mac. Republicans recently re-introduced their own legislation that would stop funding the GSEs and get the government out of the real estate business in approximately two years.
History of The Bailout Elimination Act
The measure called the GSE Bailout Elimination and Taxpayer Protection Act was first introduced by Representative Jeb Hensarling (R-Texas) in 2008 as an amendment to the Dodd-Frank Act. At that time, both agencies were intentionally excluded from the financial reform bill as political leaders thought the matter would be better addressed as a separate issue. However, the Act did require the Treasury Department to research and produce a white paper on the subject. That information was formally released in the first quarter of 2011 and Hensarling's bill was just reintroduced to the House as a fourth option.
Why Are The Changes Being Proposed
Fannie Mae and Freddie Mac were instrumental in the nation's mortgage woes as the agencies aggressively issued subprime loans as a way to compete with the private mortgage industry to generate profits for their stockholders. Estimates suggest that 90 percent of all new home loan originations go through those GSEs as well as other government departments and because of that structure they have been deemed 'too big to fail.' That prompted the government to funnel $131 billion from the Treasury Department to keep the behemoths alive and place the lenders under conservatorship. It is expected that by the time the dividends repay the assistance in 2010, taxpayers would shoulder $73 billion of that financial burden (HousingWire.com).
GSE Bailout Elimination and Taxpayer Protection Act
The proposed Republican legislation would help the government back out of Fannie and Freddie sooner than later. According to the official press release, the legislation recommends immediately ceasing government financial aid, would remove the conservatorship in two years and proposes other reforms including:
- Repeal the GSEs affordable housing goals.
- Limit the GSEs maximum mortgage portfolio size to $700 billion.
- The maximum would gradually decrease to $250 billion over a five-year period.
- Reduce the GSEs conforming loan limit from a maximum of $729,750 (in high priced markets) back to the standard $417,000.
- Raise fees associated with guaranteeing its securities.
- Require the Federal Housing Finance Agency (FHFA) to independently review the books of each agency and place into receivership if need be.
- If the GSEs were financially stable, they would be allowed to operate in a limited capacity for three years.
- During that time period, down payment requirements would increase for borrowers from the current low of 3 percent to 5 percent for the first year, 7.5 percent in the second year and to 10 percent by year three.
- An organized legacy wind down program would also be implemented to cover commitments made through a ten-year period.
After this process, the agencies would fully revert to private industry status.
According to Hensarling's website, his proposal is quite similar to one of the options included on the Treasury Departments white paper. Unlike the rest of the bills on legislation the republican House majority has been approving over the past few weeks, this one may be open to debate as Democrats agree that the government should be less involved in the real estate industry.
Regardless of what path is taken, change for how Fannie and Freddie operate, is imminent. Any revision made will alter the home-buying landscape forever. However, until these proposals take effect and the mortgage industry is operating as is, Mortgage Marvel, the industry's premiere mortgage rate origination tool, will provide consumers with accurate and up-to-date rate information, without requiring any personal information from mortgage seekers.