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Created on Tuesday, 20 September 2011 08:49

Published on Tuesday, 20 September 2011 08:49

Fannie Mae and Freddie Mac to Charge More On Mortgage Guarantee

The mortgage crisis which resulted in large scale financial losses for companies both large and small has put experts on their toes in a quest to formulate new policies and strategies that will prevent the recurrence of such a catastrophe.

It is worth recounting how the mortgage crisis threatened to collapse the entire housing sector had the government not taken the all important step of using the taxpayers’ money to bail out Fannie Mae and Freddie Mac. By taking over the two mortgage giants, government is now the largest insurer of mortgages in the country.

We have all seen and tasted the wrath of bad mortgage practices like issuing out home loans to high risk borrowers. This has set mortgage experts thinking about how deeply government would be affected, now that it holds majority of the mortgages currently in operation in the country, should another mortgage crisis occur.

There have already been unconfirmed reports that the Obama administration has plans to decentralize government’s percentage in the mortgage sector by creating a number of mortgage insurance companies that will replace government-held Fannie Mae and Freddie Mac.

However, the administration has come out to debunk this report and affirm its commitment towards handing over the mortgage industry to the private sector.

If the White House goes ahead with this plan, we would see government’s interest in the mortgage sector drop significantly.

However, the Federal Housing Finance Agency has announced its intentions of increasing mortgage guarantee fees and requiring homeowners to insure all home loans. The Federal Housing Finance Agency admits that this move will go to increase the cost of borrowing, but according to the acting director of the FHFA, Edward DeMarco, it is a necessary option to take. The FHFA’s move is aimed at reducing the level of government’s risk in home loans.

According to DeMarco, this policy is in accordance with the Obama administration’s goal of reducing public sector interest in the mortgage sector while increasing that of the private sector. So, instead of government-held Fannie Mae and Freddie Mac using the taxpayer’s money to insure home loans, borrowers and lenders would be called upon to provide the needed capital for this.

Over the years, we have known Fannie Mae and Freddie Mac to be the institutions that make a large number of mortgages in the country possible because, they buy mortgages from mortgage providers and then sell them as bonds to investors.

Through the monies paid by Fannie Mae and Freddie Mac, the mortgage providers are able to continue providing home loans to new borrowers. The mortgage giants also make money by selling the mortgages as bonds that have government backed guarantee against default. When the mortgages default, the investors get to claim their monies from the mortgage giants.

Fannie Mae and Freddie Mac through this new policy will make mortgage providers pay a higher guarantee fee on all mortgages so as to reduce its risk.