Just like the expansion of the FHA program, now the US government wants to expand the role of Fannie Mae and Freddie Mac. This would be the second major expansion of their influence in mortgage refinancing. If you refinance your house there is an 75% chance that it is guaranteed by Fannie Mae or Freddie Mac. Freddie Mac and Fannie Mae so dominate the mortgage industry right now that it would barely exist without them; however, this comes at a great taxpayer expense because they had loses in the hundreds of billions.
After the housing crash, many of these Fannie and Freddie loans had balances greater than homes were worth. Many of these underwater loans were affordability products with some features like negative amortization, teaser rates, and balloon payments. In addition, the pre-bubble fixed-rate loans had a higher mortgage rates then post-bubble mortgage rates. The Federal Reserve with it’s lowering of the federal funds rate and then purchasing large volumes of mortgage backed securities managed to push mortgage rates lower. To refinance these underwater loans the HAMP and HARP programs were created. This was first major expansion of the roles for Fannie Mae and Freddie Mac AND it was very unusual step to refinance an underwater loan. It’s absolutely riskiest loan to originate with the highest default rates and greatest default loses. Under normal conditions a lender is not going to refinance an underwater loan without extra collateral, insurance, or higher mortgage rates or a combination of these conditions. Now, available agency loanowners can refinance their mortgages with a federal guarantee and in all likelihood, we will pay for these loans with future taxpayer bailout payments.
To participate in these programs, the borrower of the underwater loan had to already have Fannie Mae or Freddie Mac loan. This still left many borrowers unable to refinance because their loans were underwritten by private lenders and never sold to Fannie Mae or Freddie Mac. The major banks have delinquency rates north of 10%, and rather than absorb those losses, they are eager to pass them on to the taxpayer.
Published December 26, 2012 Reuters
The U.S. government is considering expanding its mortgage refinancing program to include borrowers whose mortgages are not backed by Fannie Mae and Freddie Mac , the Wall Street Journal reported, citing people familiar with the discussions.
The refinancing program now being considered also seeks to include “underwater” borrowers who owe more than their homes are worth, the Journal said.
The proposal would also transfer potentially riskier loans held by private investors to the government-sponsored mortgage entities Fannie Mae and Freddie Mac, the paper said.
Such a move would require congressional authorization to temporarily change the charters of Fannie Mae and Freddie Mac, according to the Journal.
Believe it or there are a lot of Democrats and Republicans supporting this proposal. First, I think the banks control the Congress and they want to transfer the riskiest loans to the Fannie and Freddie. Second, Fannie Mae and Freddie Mac’s finances have improved, so I think this lobby believes that these entities could absorb these losses. Fannie and Freddie are even pondering the idea of do guarantee riskier mortgages with much higher costing G-fees. G-fees are the insurance premiums paid by the borrower and some mortgage tax directly to the US Treasury.
About 22 percent of all homes with a mortgage, or around 10.8 million homes, down from 12.1 million last year, were worth less than the outstanding balance at the end of June, the Journal said, citing data from CoreLogic.
Under the proposal, Fannie and Freddie would be allowed to charge higher rates to borrowers in order to compensate for the risk of guaranteeing refinanced loans that are underwater and more likely to result in default.
Officials at the U.S. Treasury could not be reached for comment by Reuters outside of regular U.S. business hours.
Combined with Fannie Mae and Freddie Mac, which buy loans and repackage them as securities for investors, Washington’s footprint in the market has grown to account for nearly nine of every 10 mortgages.
I believe this proposal will get some traction in Congress, it’s a powerful lobby that will put it’s full pressure on Congressional members in bubble districts. In the 5 years since the bubble burst there has been no large scale push to re-privatize the mortgage industry. The recent Qualified Mortgage guidelines are just away to make the Fannie and Freddie mortgages safer for the government to insure, however it would transfer some risk to the tax payers. In fact, some in public offices see higher fees from Fannie and Freddie as possible tax revenue. If this refinance proposal is approved and the housing market drops again after a massive refinance effort it will end up costing another hundred billion dollar bailout.