Government-controlled mortgage buyers Fannie Mae and Freddie Mac may reduce taxpayer risk by requiring more mortgage insurance from borrowers and charging lenders higher fees, steps that could increase borrowing costs, the head of their government caretaker agency said Monday.
Reshaping the mortgage giants three years after the federal government took over them over requires spreading lending risks, Federal Housing Finance Agency acting director Edward DeMarco said Monday at a mortgage conference in Raleigh.
The changes that could lead to higher costs for borrowers would be pursued gradually over time to avoid shocking the weak housing market, DeMarco said. But with Washington still unable to restructure Fannie and Freddie, the FHFA needed to act under its own statutory authority to ensure Fannie and Freddie continued to keep money flowing into financing home purchases, DeMarco said.
"We all knew that reforming the housing finance system was going to be difficult, but I think the general expectation was that more progress would have been made by now," DeMarco said.
Reducing the risk to taxpayers may mean private interests taking on more risk, perhaps by requiring more private mortgage insurance from borrowers and higher fees from lenders to guarantee loans, DeMarco said.
The federal government took control of the two massive mortgage buyers in 2008 to prevent their collapse as the housing market deteriorated. Bush administration officials said the action was needed to protect taxpayers and continue the availability of mortgages.
Fannie and Freddie buy home loans from banks and other lenders, package them into bonds with a guarantee against default, and sell them to investors around the world. The mortgage giants charge lenders a guarantee fee that covers projected credit losses from borrower defaults over the life of the loans. Fannie and Freddie will likely begin increasing those fees starting next year, DeMarco said.
President Barack Obama's deficit reduction package released Monday includes a proposal for Fannie and Freddie to increase guarantee fees by one-tenth of one percent for new mortgages, adding less than $15 a month to a typical $220,000 home loan. The administration said the increase would save the budget $28 billion over 10 years.
Changes in loan guarantee fees could vary based on the risk of loans and the borrower's location, with higher fees in states where it is more expensive and time-consuming for banks to foreclose on property, he said.
"These are steps we can take and we think that we're charged with taking that are supportive in that direction," DeMarco said in an interview with reporters after his talk. "Consumers will ultimately measure this by the price and availability of mortgage credit, and in a more macro sense ... whether there's a sense of stability or confidence in housing markets."
Talk of raising borrowing costs while home sales are slow is part of the dichotomy of expectations the housing finance agencies are facing, said Michael Lea, who directs real estate studies at the San Diego State University business school and a former chief economist at Freddie Mac. The FHFA can't afford to raise costs to borrowers now, but removing taxpayer support has to come eventually, he said.
"It's a tough situation because they get pressure from both sides on that," Lea said.
The FHFA's most pressing tasks include creating a framework allowing more borrowers who are underwater on their mortgages to refinance at rates now at levels not seen in decades. Few people are qualifying to refinance a home because they don't have the equity needed to refinance.
FHFA is considering expanding its Home Affordable Refinance Program to allow some borrowers whose mortgages are held by Fannie and Freddie to refinance into lower-rate loans even if they owe greater than 125 percent more than their home is worth, DeMarco said
The second key current priority is figuring out how Fannie and Freddie can resell thousands of government-owned foreclosures to improve returns to taxpayers and help boost falling home prices. A federal "request for information" seeking ideas closed last week resulted in nearly 4,000 proposals, many tailored to local economic conditions around the country. One of the ideas FHFA is considering is allowing previous homeowners to rent out the homes or for current renters to lease to own.
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