Fannie/Freddie Reforms = Higher Mortgage Rates

by Peter Thomas Ricci

Discussions on how to reform Fannie Mae and Freddie Mac get really wonky really fast, but they impact your business in very practical ways.

We’ll cut straight to the chase – if current proposals to overhaul Fannie Mae and Freddie Mac come to fruition, mortgage rates could not only increase by as much as 1.5 percentage points, but will likely impact consumers’ abilities to purchase a home.

That was the conclusion drawn by the Harvard Joint Center for Housing Studies, which just published an analysis of several post-overhaul scenarios.

150 – That’s the Magic Number

Of course, there have been other studies in the past that have looked into mortgage rates in a post-Fannie/Freddie housing market, but the Harvard study’s authors, Kent Colton and Michael Carliner, bring up a very important point. Those studies, they observed, assumed that prospective homebuyers had perfect credit.

What if, they then asked, credit standards relaxed, and someone with a FICO score of less than 750 secured a mortgage? And what if Fannie and Freddie were no longer around to guarantee that mortgage, and banks were required to keep more money in reserves, as the Bob Corker/Mark Warner overhaul bill would stipulate?

In a worst-case scenario, the outcome would not be pretty – mortgage rates could rise by as much as 150 basis points (or 1.5 percentage points), meaning that a 4.5 percent rate would become 6.0 percent, and a $1,046.91 monthly mortgage payment would increase by $146.65 to $1,193.56. In other words, some homeowners could see an extra $1,800 a year in mortgage payments.

Worst-Case Scenario

We should be very clear that the 150-basis-point jump is a worst-case scenario, so the Harvard study is not suggesting that such a thing would inevitably play out of Fannie and Freddie were reformed.

Rather, the Harvard study suggests that the increase would affect borrowers with credit scores between 650 and 750, and with downpayments around 5 and 15 percent. Earlier studies had suggested increases as small as 42 and 25 basis points, but the Harvard study’s middle estimate was still 100 basis points (so a 4.5 percent mortgage would become a 5.5 percent).

Again, this is all speculative. Congress has not approved any reform legislation for the GSEs; indeed, some have argued that with how profitable Fannie and Freddie now are, all reform efforts lack the necessary capital to pass.

But still, as agents, it’s certainly worthwhile to know how such complicated measures can affect your business in a very straightforward way.

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  • Robin Hargrove Rowley says:

    I 100% agree with this article. The recent GSE (government sponsored Entities) reforms have added features that increase rates for anyone other than the perfect borrower. In addition the “G” Fees that have been added are increasing rates pushing the Fannie Mae / Freddie Mac money higher. I see this as an effort by Congress to increase the GSE rates to attract private sector money – essentially get the rates high enough that private sector lenders will want to tackle this portion of lending. We are already seeing jumbo rates lower than Fannie/Freddie since private sector lenders have not been effected by all these reform “rate add ons” for risk. Currently JUMBO loans have a lower LTV, higher FICO score and more reserves than a Fannie Mae loan…..of course those rates will be lower than most Fannie Mae loans.

    A borrower and agent should partner with an informed lender to insure the client is being provided the best financing options. Currently I have clients writing contract trying to get the buyer into a conforming loan….frankly, to obtain the best pricing, they should put down less and go with slightly over 417K.
    Bottom-line, financing continues to be complex and you need an advocate to negotiate the best deal for the client.

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