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NAHB analysts note that the housing GSEs have been a critical component of the home finance system during a period when housing has provided the backbone of support for the nation’s sputtering economy. Further, the GSEs have been tremendously responsive in developing new programs to help achieve the Administration’s goals of expanding homeownership for minorities.
Under the auspices of HUD, Fannie Mae and Freddie Mac have provided support to primary market lenders for the development of hybrid mortgages that combine the benefits of adjustable and fixed-rate loans; lower downpayment requirements; and new mortgage products for borrowers with tarnished credit histories. And the GSEs have been at the forefront of technological innovations to streamline the mortgage process and reduce the time and cost of obtaining a mortgage.
Progress in this area will be in jeopardy if the Administration succeeds in shifting program regulation from HUD to the Treasury. There is a nearly unanimous belief within the industry that the Treasury does not view housing as a national priority and that innovative programs making housing more affordable and accessible will be threatened if program authority is placed in its hands.
Here, according to NAHB, is what will likely happen if the Administration gets its way:
First, there would be fewer new mortgage programs to address the special needs of underserved markets. With financial safety and soundness as its primary objective, the Treasury could severely slow the development of innovative programs that provide liquidity to the housing credit markets, particularly in areas affecting minority, immigrant and low-income home buyers .
Home builders would also experience negative fallout from the Administration’s plan. A number of loan programs on which builders rely could be curtailed or even eliminated if their approval authority were moved to the Treasury Department:
- Construction-to-permanent loans. Under this Fannie Mae program, the home buyer receives a construction loan that converts to a permanent home mortgage without the costs of a second closing.
- Acquisition, development and construction (AD&C) loans. Recently approved by HUD, this program allows Fannie Mae to provide liquidity directly to home construction lenders.
- Builder Grant loans. This Freddie Mac program enables builders to provide money to buyers for downpayment assistance.
- Lease-to-purchase loans. Conceived by Freddie Mac, this loan allows future home buyers to rent or lease for three years, with their expenditures going towards a future downpayment on their home.
- Multifamily loan programs.Both Fannie Mae and Freddie Mac offer programs covering debt and equity for low-income housing tax credit projects and programs to finance small multifamily rental providers, particularly in rural areas.
Second, the Administration’s proposal is also likely to result in an effort to decrease or freeze the conforming loan purchase limit, which will be $333,700 in 2004. For buyers in higher-cost markets, this would limit the benefits of Fannie Mae and Freddie Mac purchase programs and could lead to higher mortgage rates. Moreover, the impact would fall disproportionately on high-cost areas, such as California and the Northeast.
Third, given the Treasury’s frequent criticism that too much capital is flowing into housing, a reallocation of capital away from housing and into other sectors of the economy would put upward pressure on mortgage rates. The existence of Fannie Mae and Freddie Mac has lowered interest rates by at least 25 basis points. At current mortgage rates, on the purchase of a median-priced new home this represents an average reduction in mortgage payments of $336 per year, or more than $10,000 over the life of a 30-year loan. This savings enables an additional one million families — especially low-income and first-time buyers — to qualify for a home purchase.
The Administration’s plan can be viewed as the first step in the path toward the privatization of Fannie Mae and Freddie Mac. Indeed, current Administration officials have suggested that the GSE-status of Fannie Mae and Freddie Mac is no longer necessary.
If Fannie Mae and Freddie Mac were privatized, the mortgage market would return to the bad old days of the 1970s when there were regional disparities in the cost and availability of mortgage credit. Fannie Mae and Freddie Mac were created to resolve these problems.
If the GSE link is broken, the flow of capital from international and national investors would slow and mortgages will cost more. As a result, there would be less capital available in weaker underserved markets, resulting in higher housing costs for those least able to pay, NAHB says. And this would mark the return of an era in which individual financial institutions lend on the basis of their own deposits, rather than on the strength of the global capital market.
This would be akin to the current situation in financing for housing production. The lack of a secondary AD&C market has resulted in higher financing costs and disparities in the availability of such financing. This is the last thing that builders would want to see in the mortgage market.
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