With a speech in Arizona Tuesday, President Barack Obama threw his support behind a continued government role in the mortgage market, even as the government-sponsored mortgage giants Fannie Mae and Freddie Mac are phased out. Here's what this may mean for residential borrowers:
Q: How will this affect mortgage interest rates?
A: The president's approach is expected to cause interest rates to rise slightly, because private lenders would assume more risk. But government support would allow homebuyers continued access to the traditional 30-year, fixed-rate mortgage. His proposal is similar to the Senate's Housing Finance Reform and Taxpayer Protection Act, or "Corker-Warner."
Q: Are there competing proposals?
A: The House of Representatives' Protecting American Taxpayers and Homeowners (PATH) Act would end any government role in the mortgage industry, turning it all over to the private market. Supporters say this proposal will create a sustainable housing finance system that taxpayers won't ever have to bail out. Critics say it endangers the 30-year mortgage and will cause substantial increases in interest rates.
Q: Why would either bill cause interest rates to rise or affect the 30-year fixed-rate mortgage?
A: Currently, Fannie and Freddie buy mortgages from lenders, selling some as securities and assuming the risk of default. That allows private lenders to make more loans and charge lower interest rates for them. Under either of the competing proposals, lenders are likely to assume more risk, which will be reflected in interest rates.
The support of the government also reduces the risk of making loans with an interest rate fixed for three decades. Obama wants to preserve access to these mortgages.
The mortgage industry says the government's support also allows buyers to lock in an interest rate before actually buying a house.
Q: What about the Federal Housing Administration, which lends at low interest rates to buyers with less than stellar credit?
A: Obama called for strengthening the FHA to keep housing affordable for first-time homebuyers and buyers "trying to climb into the middle class."
Q: What's he proposing for homeowners with underwater Fannie or Freddie loans, who can't refinance under current rules?
A: He wants to change the rules so that Fannie and Freddie can refinance their mortgages and these struggling borrowers can take advantage of current low interest rates.
Q: How will the government role in the mortgage market change under Obama's proposal?
A: Currently, Fannie Mae and Freddie Mac buy the vast majority of mortgages, which forced the federal government to cover those mortgages and take over the two companies during the financial crisis. The president wants the two mortgage giants to wind down operations, but presumably the federal government will continue to play a role, albeit smaller, in propping up the 30-year fixed rate.
Q: What does the real estate industry say about his proposals?
A: Gary Thomas, an Orange County Realtor and president of the National Association of Realtors, called Obama's plan "a good start. Corker-Warner is much better for 30-year loans, and interest rates would probably react pretty conservatively."
Q: And the mortgage industry?
A: The Mortgage Bankers Association applauded Obama's plan to "primarily rely on private capital" while ensuring the availability of the 30-year fixed rate mortgage.
"The president is saying that whatever is created to replace Fannie and Freddie, let's make sure it's got a guarantee that the 30-year fixed rate continues," MBA President David Stevens said.
Contact Pete Carey at 408-920-5419. Follow him on Twitter.com/petecarey.