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Mortgages

Life Without Fannie Mae and Freddie Mac

Credit...The New York Times

Talk of doing away with Fannie Mae and Freddie Mac is still just that — talk. But as Congress considers whether and how to get rid of these agencies, consumers ought to be aware of how a substantial reduction in the government’s role in housing finance could affect their ability to borrow in the future.

“What’s at stake here is access to mortgages at an affordable price,” said Julia Gordon, the director of housing finance and policy at the Center for American Progress in Washington.

Fannie and Freddie have been much maligned since their heavy investment in risky loans resulted in a $188-billion taxpayer bailout during the financial crisis. Having since refocused on guaranteeing and securitizing prime mortgages, while also acting as a fill-in for fleeing private capital, the agencies now own or guarantee a majority of the country’s home loans.

As the housing market strengthens, Congress is interested in transferring some or all of that risk back to the private sector. Last month, President Obama voiced support for a bipartisan effort in the Senate to replace the government-sponsored agencies with a new agency with a much-reduced role.

A competing bill in the House would go even further to almost completely privatize the mortgage market.

If a winding down of the two agencies is inevitable, some government guarantee should remain to ensure lending is widely available and safe, Ms. Gordon said.

“The private market likes to look at every single loan — they only want the loans that are the crème de la crème,” she said. “If you scale back the government guarantee too much, then you end up with a really segmented market where people who have pristine credit scores and lots of money can get good, safe, well-priced mortgages, but everybody else can’t.”

A former administrator at the Federal Housing Finance Agency, Ms. Gordon cited analyses that estimate a half-percentage-point rise in borrowing costs if a “fairly robust” government guarantee stays in place, and an increase of at least a whole percentage point if it is dropped completely. The reason for the added expense is that “the market is going to perceive greater risk associated with the loans,” said Alan MacEachin, the corporate economist for the Navy Federal Credit Union, a four million-member banking institution in Virginia. “If there’s greater risk, the markets have to be compensated, and that compensation is higher interest rates, or risk premiums, if you will.”

With a greatly reduced government backstop, borrowers would likely have to contend with higher down payment requirements, Mr. MacEachin said. And, he added, “lending conditions would be more reactionary to what’s going on in the market. We could only imagine what could have happened had the government not stepped in during the mortgage crisis.”

Any reform isn’t likely to happen for at least a couple of years, especially since the now-profitable agencies are repaying the government for the bailout “rather handsomely,” Mr. MacEachin said.

Despite widespread negative perceptions of Fannie and Freddie, the conversations about reform have, in a “refreshing twist,” drawn attention to the positive role the agencies play, noted Alex Matjanec, a founder of MyBankTracker.com, a personal finance Web site.

A central argument for eliminating Fannie and Freddie is to get taxpayers off the hook for any further bailouts. But Mr. Matjanec thinks that professed taxpayer protection may be false assurance.

“If a major bank fails,” he said, “I think the government will treat them like a General Motors and bail them out anyway.”

A version of this article appears in print on  , Section RE, Page 6 of the New York edition with the headline: Life Without Fannie and Freddie. Order Reprints | Today’s Paper | Subscribe

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