So you found a three-bedroom beauty with a graceful maple in the front yard. But before your broker can attach that red Sold sign, you need a home loan.
Plenty of lenders would welcome your business. Regardless of where you apply, though, chances are great the bank will sell the mortgage on the secondary market and use the income to make more loans.
Congress is considering significant changes to Fannie Mae and Freddie Mac, the entities that buy about 90 percent of home loans on the secondary market.
Some people worry that if lawmakers bungle the job, the result could be less money available for borrowers like you.
Heres the tricky part: Even though they agree the overhaul should be handled carefully, banking industry watchers dont agree on what the end result should look like.
Fannie and Freddie were private companies before the mortgage meltdown almost five years ago. Their shares traded on the New York Stock Exchange.
The federal government created some desperately needed financial stability by taking control of the organizations in 2008. At this point, Fannie and Freddie are private-government hybrids whose bailout cost taxpayers $131 billion.
Three industry insiders offered distinctly different views on where Fannie and Freddie should fall on the continuum from public to private organizations.
If it ain’t broke …
Kevin Deardorff gets fighting mad when he hears people badmouthing Fannie and Freddie.
Lake City Banks executive vice president says special-interest groups have heaped blame on what he considers vital organizations that arent broken.
Fannie and Freddie work very well, but they were the political scapegoat, quite frankly, he said, referring to the housing bust and subsequent financial crisis.
Warsaw-based Lake City resells first-mortgage loans to Freddie Mac, with which it has an established relationship. If the loan isnt high quality or exceeds a certain dollar limit, Freddie wont buy it. Thats the way its always been, Deardorff said.
The infamous liar loans that were made to applicants with no proof of adequate income were bundled as private label securities and resold, Deardorff said. They were rated as having higher risk – not high enough, some argue – and paid higher interest to entice fearless investors.
Those were the loans with high default rates – not the ones Fannie and Freddie handled, he said.
Deardorff cant imagine that a replacement structure would improve on the current system in any way. But he can imagine a serious potential pitfall.
If banks have to start keeping long-term fixed-rate mortgages in their portfolios, well those loans will become extinct.
We cant do it, Deardorff said.
Todays historically low interest rates are bound to go back up at some point, long before a 30-year mortgage comes due, he said. Banks cant tie up much money under that scenario.
The result, Deardorff said, would be significantly less money to lend to homebuyers. Not just for Lake City Bank – but for every bank.
It dismays me a lot, he said. Very much.
A private matter
Bob Jones runs the largest publicly traded bank headquartered in Indiana.
The president and CEO of Old National Bancorp believes strongly in the power of the marketplace to right any wrong.
Jones wants to see Fannie and Freddie – or their replacements – become fully independent, private companies.
Shareholders would keep them in line by agitating from within for reforms or selling stock if performance falls short, he said.
I just think the private markets, over time, will tend to serve the consumer better, he said.
Like Deardorff, Jones worries about borrowers.
No matter what happens, we have to remember the importance of mortgages to the consumer, he said. I think the mission of Fannie and Freddie needs to be preserved.
But what concerns the Evansville-based CEO just as much is his fear that a gridlocked Washington wont effectively shift the organizations to private status, a move that would insulate taxpayers from future liability.
If you look at the challenges Fannie and Freddie have had over the last five to six years, obviously, Congress has to address the issues, he said. I hope something gets done.
Ann Grochala agrees with Jones that something must be done.
But the vice president of lending and housing policy for the Independent Community Bankers of America falls short of advocating for private enterprise.
Grochala, speaking on behalf of the Washington-based industry association, believes the federal government needs to back the organizations in case of catastrophic losses.
But, she added, its not good for 90 percent of home loans to move through the government-run system. Congress needs to find a better balance, she said.
Its huge risk to the taxpayer, she said.
Grochala supports the idea of having the lenders that sell loans to Fannie and Freddie assume ownership and primary responsibility for them. That list would include banks, thrifts, credit unions and other financial institutions.
The trade group, which represents 7,000 community banks, has testified before Congress on the secondary mortgage market issue and plans to follow the process closely until it reaches resolution.
The doomsday scenario, in their minds, is what happens if Fannie and Freddie are dissolved without an adequate replacement. Community banks might be forced to sell mortgage loans to larger banks, which are competitors.
If that happened, the loan documents would include contact and other information that could allow the bigger banks to lure the customers away.
Small-town banks, the group warns, could become a vanishing species.