Homebuyers will see and feel the pinch if Congress shuts down Freddie Mac and Fannie Mae mortgage guarantee programs, says All Western Mortgage’s Derrick Strauss.
Aicube: Why does the government want to put an end to the government-controlled mortgage guarantee programs?
Derrick Strauss: Congress is in the process of working out a plan to overhaul the nation’s mortgage finance system. Fannie Mae and Freddie
Mac were developed to encourage banks to lend money. However, it has backfired as taxpayers were left to foot the bill for the billions of dollars in bad loans left in the wake of the housing crisis.
Aicube: What will happen to buyers if these two entities are dissolved?
Derrick Strauss: Homebuyers, as well as those who refinance, will most likely end up paying higher mortgage rates since funds will come from and be backed by private sources.
Aicube: Will all mortgages be shifted to the private sector?
Derrick Strauss: That is the plan, but many policymakers fear that a complete governmental pull out would cause more harm than good. They believe that a solid housing market can only be established by offering the lending institutions some security.
Aicube: How were Fannie Mae and Freddie Mac affected by the real estate bubble bust?
Derrick Strauss: They were both almost crushed under the weight of bad debt accepted by the banks that they guaranteed. A lot of this came from mortgages aimed at low-income families and adjustable-rate loans, which were attractive in the beginning but ballooned suddenly, leaving already struggling families clamoring for a way to make up the difference. Millions of homes went into foreclosure with an unprecedented number of buyers going into default on their loans.
Aicube: Have Fannie Mae and Freddie Mac repaid the federal government for the bailout funds?
Derrick Strauss: Yes, in fact, the two companies have repaid nearly two-thirds of their original bailout. To date, they have pumped more than $132 billion back into the U.S. Treasury.