Homeowners could pay more under Obama Fannie and Freddie plan

by Ryan Smith08 Aug 2013

If President Barack Obama and Congress follow through with plans to shut down Fannie Mae and Freddie Mac, homeowners could find their wallets a bit lighter each month, according to a Moody’s economist.

Mark Zandi, chief economist for Moody’s Analytics, told USA Today Aug. 7 that homeowners would probably see a slight increase in their mortgage rates if plans to phase out Fannie and Freddie are realized.

Obama voiced his support Aug. 6 for a Senate bill, introduced by Bob Corker (R-Tenn.) and Mark Warner (D-Va.) that would replace Fannie and Freddie with another government reinsurer. The new reinsurer would be part of a mortgage system in which private capital would be required to take at least 10 percent of first losses on mortgage securities before the government stepped in. Meanwhile, a House bill written by Financial Services Committee Chairman Jeb Hensarling (R-Texas) would dismantle Fannie and Freddie without providing a replacement.

Both bills seek to settle more of the risk on private capital. However, Zandi told USA Today that as private investors shoulder more of the risk, they’ll likely spread at least a little of the pain to consumers.

"It will mean higher mortgage rates," Zandi said. "The question is how much higher."

Zandi estimated that consumers could pay about $75 more per month in interest on a typical mortgage under the Senate plan or $135 more per month under the House plan, according to USA Today.

Most Democrats favor the Senate bill, which reduces the government’s risk but still provides a backstop for the mortgage system. Industry leaders also seem to prefer the Senate plan. In a statement Aug. 6, National Association of Home Builders Chairman Rick Judson applauded Obama’s support of the plan, which he said “affirm(ed) the importance of maintaining a federal backstop as part of efforts to revamp the housing finance system and protect the 30-year mortgage.”

The House bill, meanwhile, would virtually eliminate government involvement in the industry.  It cleared Hensarling’s committee without a single Democratic vote, and is expected to go to the House floor within a few months, according to USA Today.

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