Our leaders in Washington are once again stirring up talks about “mortgage reform.” While this sounds encouraging for consumers at first glance, there may be many unintended consequences that hurt would-be home purchasers and that would further drive down housing prices.
One of the proposals once again being debated is doing away with Fannie Mae and Freddie Mac. Fannie and Freddie are both “government sponsored entities,” or GSE’s. While they are technically private companies, they having the support and backing of the federal government. In fact, you may remember that in 2008 the federal government stepped in to bail out these faltering giants of the mortgage industry. When working properly, Fannie Mae and Freddie Mac played an important role in the residential mortgage business. They essentially injected liquidity into the market. In plain English, that means they helped the banks free up money to lend to home buyers. That, in turn, helped keep interest rates affordable.
Of course, Fannie Mae and Freddie Mac got greedy and their executives became more concerned with lining their own pockets than serving the public interest for which they’d been created.
Now, homeowners and future homeowners across America may have to pay for the sins of these few crooked executives. No doubt, Fannie and Freddie became broken, and the bailout the federal government gave them has and will continue to cost taxpayers billions of dollars. However, when your car breaks down, you don’t just throw it away–you fix it, because your car serves a valuable purpose. The same is true of Fannie Mae and Freddie Mac.
When Fannie and Freddie are working properly (and that is the key), they serve a valuable purpose: they make home ownership in America more affordable and hence, a reality for more folks. Now, that doesn’t mean that every American is entitled to a mortgage or deserves a loan well beyond their ability to repay. And it doesn’t mean that banks should be allowed to create exotic loans that fool consumers into thinking they can afford champagne if they’re on a beer budget. But a properly functioning Fannie Mae and Freddie Mac does mean that deserving families have a better chance at getting a loan they can afford.
Of course, Washington usually seems to be more concerned with politics than with doing right by the American people, so no one knows how mortgage reform is going to turn out. However, stay tuned for updates, as I expect the entire industry will be undergoing major changes in the next 6 to 18 months.