The summary of the Fannie/Freddie report from wsj.com:
The paper proposes gradual increases in minimum down payments so that Fannie and Freddie buy loans with a minimum 10% down payment. Currently, borrowers can make smaller down payments if they purchase mortgage insurance. The paper also recommends raising gradually fees that Fannie and Freddie charge to lenders, in order to make mortgages that aren’t government-backed more competitive. It calls for slowly reducing the maximum loan limits the firms can purchase but doesn’t specify how far those loan limits should drop.
Current federal law allows the companies to guarantee mortgages of as much as $729,750 in some high-home-price areas and will expire Oct. 1. The administration recommends that Congress not renew the law. The move would drop the ceiling to $625,500. While not being specific, the administration’s paper calls for further reductions in that ceiling over the next several years. Mortgages above the ceiling are known as jumbo loans and usually require a higher interest rate.
The administration also says banks should be required to hold more capital to withstand future housing downturns, and the paper calls for “more conservative underwriting standards that require homeowners to hold more equity in their homes.”
The paper also calls for reducing the role played by the Federal Housing Administration, a New Deal-era agency that has been at the heart of the administration’s efforts to help Americans secure low-down-payment mortgages in the wake of the mortgage market’s collapse three years ago. The FHA doesn’t lend money to home buyers but insures lenders against default; in exchange for that backing, borrowers must pay annual insurance premiums. The administration says it will increase those fees later this year.
Because the housing market remains fragile, those measures would be phased in gradually. The administration believes Fannie and Freddie are past their peak losses, and the vast majority of those have stemmed from loans it bought as the mortgage boom turned to bust.
1. If they let the maximum loan amount expire on October 1st, and the new maxium loan amounts drop $100,000 or so, it should create a real frenzy in the $800,000 to $1,000,000 range between now and then. We’ve already seen that buyers would rather wait, than pay too much, so I don’t think every listing in that range is going to sell just because it’s for sale.
2. The costs of obtaining a mortgage are going to increase. Between Fannie/Freddie gradually raising fees they charge lenders, more-costly mortgage insurance, and rising interest rates, buyers will fret that they better get in now before loans get more expensive.
3. The banks will be slow to roll out private securitization, drying up the availability of mortgages in general.
Many sellers will likely stay ignorant, just hoping for a miracle to fall in their lap. But for those who are willing to put an attractive price on their home, especially in the $700,000 to $1,100,000 range, they should find an exuberant audience.