NEW YORK (MainStreet) — The rumor mill is chugging along over the possibility the federal government could shutter Fannie Mae and Freddie Mac, albeit on a slow, gradual basis.
Earnings at both government-run enterprises have been anemic, and economists and mortgage industry professionals are talking openly about a future without them.
That could change the consumer mortgage landscape dramatically,says bank analyst Dick Bove, an analyst who tracks the mortgage market.
“Is the United States ready to take a shock to housing prices because we’re getting rid of 30-year fixed rate mortgages?” Bove asks. He told CNBC that banking executives have told him privately they cannot make money on 30-year fixed-rate home loans anymore due to new rules on capital reserves and securitizing mortgages, and he says the U.S. Treasury Department is aiming to phase out Fannie Mae and Freddie Mac by 2018.
That would take two of the biggest buyers of 30-year mortgages out of the equation. Bove says banks are eager to step in to offer consumer residential mortgages with significantly shorter durations — between five and 10 years — but lending experts (many of whom agree with Bove) say that would drive up the costs of buying a home, driving the American Dream even further out of reach of lower- and middle-class consumers.
Jeff Taylor, managing director at Digital Risk, an independent mortgage processor that handles more than $8 billion per month in mortgages, agrees with Bove and says the end of the GSEs would lead to shorter mortgages and more expensive mortgages. That said, Taylor finds it hard to believe banks would want to be holding a note for 30 years in this rate environment. “Thirty-year mortgages are harder to hedge against,” he says. “In a different rate environment, maybe the scenario would be different, but for now there would be no incentive to keep offering 30-years as an option.”