Republicans are raising the prospect of making a big change to home loans.
Two of President-elect Donald Trump’s Cabinet picks, along with Republican lawmakers, have been speaking publicly about curbing government backing for the kind of loan that the majority of Americans rely on to buy a house: the 30-year fixed-rate mortgage. Supporters of the change say removing U.S. backing could protect taxpayers from being on the hook for billions of dollars in the event of a market collapse – as they were after the financial crisis of 2008.
But some in the housing industry say that without the government’s support, 30-year mortgages may become scarce, leaving home ownership out of reach for many Americans.
“Eliminating the government guarantee would likely lead to higher rates, making credit more expensive, or take the 30-year fixed-rate option off the table altogether,” said William Brown, president of the National Association of Realtors.
Fannie Mae and Freddie Mac, created by the government and spun off as shareholder-owned corporations, for years have been the foundation of the housing market and have backed the 30-year mortgage.
Making changes to the housing market carries political risk. If home buyers can’t obtain affordable mortgages, they may turn against Republicans responsible for the change. About 71 percent of home purchases and refinances in October used a 30-year fixed-rate mortgage, according to the Urban Institute, a Washington-based research group.
Ben Carson, Trump’s nominee to be secretary of the Department of Housing and Urban Development, told senators Thursday that the 30-year mortgage could survive without a government guarantee. He said the private market could take on much of the responsibility.
“You can’t do it overnight. It has to be a gradual change,” Carson said at his confirmation hearing. “We can’t do it in a haphazard way, and we can’t do it in an ideological way.”
Trump hasn’t detailed any formal policy on mortgages, and Carson’s comments came only after being asked about the topic. Transition spokeswoman DJ Nordquist said in an email after the hearing that Carson “believes strongly” in the need for a 30-year mortgage option.
Until recently, such debates have been mostly academic. While the Republican-controlled House Financial Services Committee has passed legislation that would constrict the government’s role in the market, such plans never had much of a chance getting past the Senate or President Barack Obama.
Eliminating the government guarantee would likely lead to higher rates, making credit more expensive, or take the 30-year fixed-rate option off the table altogether.
William Brown, president of the National Association of Realtors
Now, with Republicans controlling the legislative and executive branches, curtailing the government-mortgage guarantee is becoming more than an ideological pipe dream.
Fannie Mae and Freddie Mac, created by the government and spun off as shareholder-owned corporations, for years have been the foundation of the housing market and have backed the 30-year mortgage. They purchase mortgages and package them into bonds, absorbing much of the risk, making it easier for homebuyers to obtain loans and freeing up money for banks to make more loans. When the housing market melted down in 2008, the government spent $187.5 billion bailing out Fannie and Freddie. Since then, they’ve become profitable again and sent the government more than $250 billion in dividends.
Steven Mnuchin, the president-elect’s pick for Treasury secretary, said Fannie and Freddie should “absolutely” be privatized, in an interview with Fox Business Network on Nov. 30.
Some mortgage investors and others in the housing industry are expecting an overhaul.
“I don’t know anyone who’s not at least paying lip service to the idea that having a market dominated by the government is not a good idea,” said Lewis Ranieri, who runs an investment-management firm and helped invent the mortgage-backed security.