Phasing Out Fannie and Freddie?

If you’ve been paying attention to the news coming out of Washington lately, you may have heard that Congress plans to shut down Fannie Mae and Freddie Mac. The plans would phase out the government-controlled mortgage guarantee giants over the course of five years.

The push to dismantle Fannie and Freddie is a result of the housing crisis the country has experienced. Freddie and Fannie teetered under a crush of massive losses on risky mortgages before being bailed out to the tune of $187 billion, about 2/3 of which has already been paid back to the government.

The House Republican bill would practically entirely privatize the mortgage market, andd limit the Federal Housing Administration to insuring loans only for first time home buyers and lower-income borrowers. The Senate's bipartisan plan includes a new agency that has a continued, but more limited, government role in insuring a wider range of mortgage securities.  The idea behind both of these plans is to shift more mortgage financing risk from to the private sector to prevent taxpayers paying for future bailouts.

But there's a price homebuyers would likely pay for having private investors shoulder more risk to protect taxpayers.

"It will mean higher mortgage rates," said Mark Zandi, chief economist at Moody's Analytics. "The question is how much higher."

Typical borrowers could pay about $75 per month in extra interest payments, about half a percentage point, on an average mortgage under the Senate proposal, Zandi estimated, and about $135 more under the House plan. That's on a conforming loan of about $200,000 with the borrower providing a 20 percent down payment.

"You have to assume that almost in any future model being drafted, loans will be more expensive," said David Stevens, CEO of the Mortgage Bankers Association and a former Obama administration housing official.

Housing advocates warn that if the government's role is diminished too much, mortgages could be virtually nonexistent for people with lower credit scores and smaller savings for down payments. They also voice concerns that 30-year fixed-rate mortgages could become harder to find and more expensive for borrowers with modest incomes because lenders would be less willing to offer such long-term loans without the government’s guarantees.

Nothing is set in stone yet, though. Given the split between the two plans, the rival bills are likely just the opening volley in what will probably be a long fight.