FHA Policy: What happens if Fannie Mae and Freddie Mac disappear?

by Karen Lawson
February 14th, 2011

The White House released a white paper stating proposals for winding down Fannie Mae and Freddie Mac, the two government sponsored enterprises that have largely funded mortgage lenders by purchasing the majority of their newly originated home loans. If Fannie and Freddie go away, how will this affect the Federal Housing Administration (FHA)? The agency could grow, or may shrink if the current administration and legislators are determined to reduce government’s role in U.S. mortgage lending.

Hypothetical demise of Fannie Mae and Freddie Mac: Would FHA grow, or diminish?

Although critics point out that government currently has too large a role in U.S. home loans, it’s unclear what would happen to the FHA if Fannie and Freddie are liquidated. It seems likely that the government would continue to play a significant role in working with lenders and communities in support of affordable housing and home loans, but the administration is suggesting changes that could make home loans less affordable for first time buyers with little cash and moderate income families currently depending on FHA for buying homes or refinancing existing mortgage loans. Changes to FHA guidelines as proposed in the white paper include:

Reducing FHA maximum mortgage amounts: FHA loan amounts are currently in line with Fannie Mae and Freddie Mac’s maximum mortgage amount of $417,000 for conforming mortgage loans, but the agency also approve mortgage limits as high as $729,750 in established high cost areas. If Fannie and Freddie lower maximum loan amounts, it’s likely that FHA will also do so.

Charging 0.25 percent more for FHA mortgage fees: This would either add to the up-front mortgage insurance fee paid at closing, or increase the annual mortgage insurance amount that is pro-rated monthly and added to monthly mortgage payments.

Increasing the minimum down payment for FHA loans from 3.5 percent to 5 percent: This proposal has been brought up before, but lawmakers supporting methods for providing affordable home ownership are protesting this idea on behalf of homeowners who rely on low down payment mortgage loans for buying their first homes or refinancing existing mortgages on homes that have lost most of their value.

The Administration states that these ideas are presently “talking points,” but how FHA will be impacted by changes to Fannie and Freddie and its own lending requirements can go either way. FHA could become a larger agency and guarantee sales of mortgage loans to secondary market investors as well as guaranteeing home loans for FHA mortgage lenders, or FHA could diminish its role in US housing and mortgage lending.

If FHA loans disappear, it’s doubtful that moderate income borrowers will have many, if any choices for financing and refinancing their homes.

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