JEFFREY BROWN: President Obama returned to the topic of housing today.
Margaret Warner has that.
MARGARET WARNER: The president today vowed to push Congress to pass broad housing reform by the end of the year, one of his key proposals, wind down the roles of Freddie Mac and Fannie Mae, the two massive mortgage finance companies taken over by the federal government in the depths of the housing crisis.
In Phoenix yesterday, he endorsed a Senate proposal to — quote — “end Freddie and Fannie as we know them.”
PRESIDENT BARACK OBAMA: Private capital should take a bigger role in the mortgage market. I believe that our housing system should operate where there’s a limited government role, and private lending should be the backbone of the housing market.And that includes, by the way, community-based lenders who view their borrowers not just as a number, but as a neighbor.
MARGARET WARNER: Freddie and Fannie have been in government receivership since failing nearly five years ago, costing the government $187 billion to bail them out. Now they are turning a profit and are on track to fully repay that amount by 2014. Two out of every three new home mortgages today are still guaranteed by Freddie and Fannie, 68 percent of the market.
To explain how the president’s proposal would change that landscape, we turn to Guy Cecala, publisher of “Inside Mortgage Finance,” a housing industry research publication.
And, welcome, Mr. Cecala.
Now, the president has been talking since taking office in 2009 about reviving the housing and mortgage market. Do you see these statements this week as significant?
GUY CECALA,”Inside Mortgage Finance”: Yes.
It’s the first time in several years that we have heard a position advanced by the White House, and somewhat significant in that he’s talking about specifically changing the existing system we have of closing down Fannie Mae and Freddie Mac and coming up with something to replace them, but maintaining some sort of government presence in the housing market.
MARGARET WARNER: So, how would that work? Because he’s not proposing ending all government guarantees.Is that right?
GUY CECALA: Yes.
He’s talking about a Senate proposal which is bipartisan, at least in the Senate, that talks about setting up a federal mortgage insurance corporation that would operate somewhat like the Federal Deposit Insurance Corporation, in that it would collect money from lenders and in return give them a government guarantee.
MARGARET WARNER: So, in other words, there would be fees paid?
GUY CECALA: Exactly.
MARGARET WARNER: Explicitly.
So, what is the thinking behind this as to how this would prevent the kind of unscrupulous lending to unqualified borrowers that really precipitated the whole housing crises?
GUY CECALA: Well, the legislation specifically says the only type of mortgages that can go into these new securities insured by the Federal Mortgage Insurance Corporation would be super-safe.
They would have to be — couldn’t have any features that were considered predatory or anti-consumer.So they would be the safest mortgages that we would have.
MARGARET WARNER: So, we’re really talking about tighter regulation?
GUY CECALA: It’s tighter regulation, but it’s modeled after the Dodd-Frank act, and it’s pretty much a regulation that the Consumer Financial Protection Bureau has already finalized and put in place to take effect in early 2014.
MARGARET WARNER: Now, aren’t — haven’t tighter standards already been put in place, just anecdotally? There are certainly many reports of how much harder it is to get a mortgage, how much more documentation is required.
GUY CECALA: There’s a combination of things.
Certainly, the standards are tighter that would have been put in place by government agencies and to some extent regulators.
MARGARET WARNER: And is that including Freddie and Fannie?
GUY CECALA: Yes, exactly.
But the issue too is that lenders are imposing tougher standards on top of those. And that’s because they’re very concerned about the losses that they have been asked to compensate the government for Fannie and Freddie, it has required them to buy back mortgages. HUD and the FHA have asked them to indemnify them from losses.
So, rather than take any chances going forward, they have said, let’s make the mortgages as safe as possible. Instead of having a 650 credit score, let’s ask for a 750 credit score, that type of thing.
MARGARET WARNER: So, now, haven’t there been people who have been arguing that’s actually a good thing?
GUY CECALA: It’s a good thing if you want super-safe mortgage market environment, but you’re also talking about a much smaller pool of Americans who are qualifying to buy a home.
MARGARET WARNER: Even now? You’re saying, even now?
GUY CECALA: Yes, oh, exactly.
You know, compared to 2005 or 2006, we’re probably talking 30 to 40 percent less.
MARGARET WARNER: Now, are private banks, are commercial banks interested do you think in extending mortgage loans? And is that private market that currently interested — is the private securities market interested in buying and selling mortgage-backed securities, like Fannie and Freddie do, without government guarantees?
GUY CECALA: There is a — what we call a non-agency mortgaged-back securities market that exist now, but it’s a fraction of the size of the government mortgage securities market. And it’s because it doesn’t have a government guarantee and investors are very skittish since the subprime crises and everything else that if they buy these securities that there will be losses on them.
MARGARET WARNER: And so are you saying that there’s question out there just among the industry you cover about whether the private industry would step up to it?
GUY CECALA: There certainly is.
And that’s why what Obama is endorsing essentially is maintaining a government guarantee, but having it as catastrophic insurance, effectively, and that private lenders would have to step up and pay a certain level of the first losses. But the security they would be selling would have a complete government guarantee.
MARGARET WARNER: So what would this mean for consumers, would-be borrowers, would-be sellers?
GUY CECALA: In theory, it means that interest rates are probably going to be higher than they normally would be.
Fannie and Freddie maintained a huge mortgage securities market. They purchased them. They provided for a lot of liquidity. You certainly wouldn’t have that, at least not initially, in that. So that would probably result in higher interest rates.
MARGARET WARNER: Now, would there also be higher fees actually from borrowing?
GUY CECALA: Probably not, because right now borrowers don’t realize it, but lenders pay a fee to Fannie Mae and Freddie Mac to guarantees mortgages, and that fee is always passed right on to borrowers.
MARGARET WARNER: So, then what would be so different, I mean, if they’re already paying these fees now?
GUY CECALA: It would be the value of the securities themselves and how much that would effectively fetch in the securities market by other investors.
MARGARET WARNER: Let me go back to something that the president said he wanted to preserve, and that is the 30-year fixed-rate mortgage, which actually a lot of more people returned to after the housing level burst. What’s the future of that under this new system?
GUY CECALA: Well, that’s one of the reasons why I think the president’s supporting some role for the government, because it would be very hard to preserve the 30-year fixed-rate mortgage, unless you could package it into a mortgage-backed security that had a government guarantee and that investors would want, because, let’s face it. Interest rates are probably rising over the next few years.
And most people, banks, don’t want to hold a fixed-rate mortgage on their books. They would rather have an adjustable-rate mortgage.
MARGARET WARNER: And very briefly, as a veteran of watching these legislative battles over Fannie and Freddie all these years, what do you — how do you assess the prospects on the Hill?
GUY CECALA: Slim. This is going to be controversial. The Republicans in the House have already staked out a position that they don’t want any government involvement in the mortgage market going forward. They like the idea of winding down Fannie and Freddie, but they don’t want anything to replace it.
MARGARET WARNER: Guy Cecala, thank you.
GUY CECALA: You’re welcome.