Farewell Fannie and Freddie, Hello Renter Nation


In an earlier AOL Real Estate post, I speculated that the 30-year fixed rate mortgage -- the mainstay of residential housing funding in the United States -- was on its way out. I thought that based on comments from administration officials, think tanks, and other leaders, the goal of the Obama administration was to move towards "sustainable housing" which backs away from homeownership and incorporates rentals as one of the primary objectives of federal housing policy.

Based on the recent proposal to eliminate Fannie Mae and Freddie Mac by the Obama Administration, it appears that I wasn't completely out to lunch.

The introduction sets forth the objectives:

Our plan champions the belief that Americans should have choices in housing that make sense for them and for their families. This means rental options near good schools and good jobs. It means access to credit for those Americans who want to own their own home, which has helped millions of middle class families build wealth and achieve the American Dream. And it means a helping hand for lower-income Americans, who are burdened by the strain of high housing costs.

The report by the Treasury and HUD is fairly straightforward in stating the objectives, even if it
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plays games with actual recommendations and timelines.

There is much consternation within the housing and mortgage industries over this, and other proposals, coming from the Obama administration, as well as the GOP-controlled House. At the same time, many industry insiders believe that the power of the housing and finance lobbies will ultimately prevail and that the final plan would preserve some significant role for Federal government in the financing of homes.

Here's where I beg to differ.

When you have both the New York Times -- a bastion of liberal thought -- and the Wall Street Journal -- whose Op/Ed pages normally track conservative thought -- agreeing that the current system is totally broken, we are at a political moment where the housing lobby has to be thinking "minimize the damage" rather than "win the war."

Read these words:

Sure, these entities would be overseen by a "strong regulator," as the Mortgage Bankers Association asserts. But if the credit crisis demonstrated anything, it was how easily regulators can be co-opted by the enterprises they are supposed to oversee. And if the mission of these "new" guarantors includes affordable-housing goals, you can be sure that regulators will again be persuaded to let them take more risks in the name of meeting homeownership benchmarks.

Typical of the regulation-hatin' capitalists at the Wall Street Journal! Except that was from Gretchen Morgenson, an editor and columnist at the New York Times. Meanwhile, the WSJ gushes:

The Administration puts the case for federal withdrawal from the broader housing market in compelling terms: "The strength of this option is that it would minimize distortions in capital allocation across sectors, reduce moral hazard in mortgage lending and drastically reduce direct taxpayer exposure to private lenders' losses." Bravo.

Bravo. Wow. The Wall Street Freakin' Journal telling the Obama Administration "Bravo" over economic policy.

However this upcoming battle shakes out, it seems clear that Fannie Mae and Freddie Mac have no friends left on either the Left or the Right. It may take years, but they will be wound down and American housing finance changed for good. Mortgages will be harder to get, more expensive, and safer for investors. Take that to the bank. (Actually, the bank will gladly take it to you, so you can relax and wait for that.)

Here's the next piece I'm waiting to find out more on. There is no doubt that the Administration believes that rentals will become a new focus of Federal housing policy. They've pretty much said so, and have been saying so for a while now. What will be the form of that policy? Will it be, as I've speculated, a new mechanism for encouraging multifamiliy development, especially under Section 8? The Report by Treasury and HUD contains these tantalizing paragraphs:

Promoting a housing finance market that provides liquidity and capital to support affordable rental options can alleviate the high rental burdens that many low-income households face. It can also expand rental options for low-income households in urban, suburban, and rural communities of opportunity, with good jobs for parents and quality schools for children. Private credit markets have generally underserved multifamily rental properties that offer affordable rents, preferring to invest in high-end developments. By contrast, Fannie Mae and Freddie Mac developed expertise in profitably providing financing to the middle of the rental market, where housing is generally affordable to moderate-income families. As we wind down Fannie Mae and Freddie Mac, it will be critical to find ways to maintain funding to this segment of the market. (emphasis added)

One option the report puts forth is to "expand FHA's (Federal Housing Administration) capacity to support lending to the multifamily market." Uh-huh.

I believe that as Fannie and Freddie are wound down, we will see those people start to transfer over to either the FHA or some new agency, or a government chartered entity (e.g., FDIC), responsible for "supporting" multifamily lending.

This may or may not be a good thing; it's too early to tell. But at this point, I'm feeling positively Nostradamus-like.


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