Government plans to wind down Fannie Mae, Freddie Mac

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8th Aug 2013

On Tuesday, President Obama indicated that he will support a congressional plan to wind down Fannie Mae and Freddie Mac, but conditioned his support on a guarantee of continued access to 30-year mortgages for borrowers.

Obama wants private capital to take a bigger part in the housing market. I’m not a fan of mortgage securitization (specifically the lack of proper documentation and large-scale shortcuts like MERS), but I think it’s a necessary cog in providing liquidity to the mortgage market.

Privatization of the capital funding for mortgage securitization will lead to the disappearance of fixed rate mortgages in a bank-led adjustable rate mortgage market. Private-backed mortgages will not have the cheap, government-guaranteed funding that is available now. Shutting down Fannie and Freddie will lead to more stringent loan requirements and increased rates.

Banks have been benefiting from cheap money and not passing the savings on to the consumer. Either bank profits have to decrease to keep the cost to the consumer the same, or the cost to the consumer will have to increase to ensure continued bank profits.

Realistically, I don’t think congress or the market could implement a private mortgage securitization model to replace Fannie and Freddie before 2015.

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