As a result of the bail-out of Fannie Mae and Freddie Mac (US$188bn) the US Senate Banking Committee is considering a remake of these institutions and reforms which will fundamentally change the nature of mortgages in the US and by all accounts the changes will result in higher mortgage rates –in some cases much higher.

It was decided that one key problem with Fannie Mae and Freddie Mac was that they required far too little capital when backing loans and when the markets started to crash in 2008 there was simply not enough money to undergird the loans made – hence the bailout.  The news system would require more than twice as much capital as before and it would require that mortgage issuers shoulder a bigger share of any loss that takes place.  This would go a long way towards protecting the integrity of the successor organization and the taxpayer would be far less likely to have to come to the rescue in the future. It also means that mortage rates are almost guaranteed to rise and that is a concern to the housing sector. Given that demand for new and existing homes have dropped this year on the basis of less than a point hike in mortgage rates it is likely that even more dramatic change will be in store if rates rise by 2.5% – one of the suggested scenarios.

Armada’s analysis:  There are still many aspects of the reform that are unknown and there will be discretion given to the regulators. The estimate at this point is that rates will rise by between 0.5% and 1% but that will depend on the credit status of the borrower. Those with good credit and standing will pay a smaller mortgage rate but those in a weaker position could easily see a gain of between 2.5% and 3%. Many assert that this is the way it should be as the weaker borrowers that made their way into the system last decade were at the heart of the collapse. These were the sub-prime loans that started to crash and pulled the whole system down with them.

On the other hand the notion of building communities with homeowners will be set back by the fact that most in these communities will not qualify for a mortgage they can afford. The mission of the old system was in part to get as many people in the housing market as possible but that mission has been replaced by a desire to ensure that taxpayers will never be at the kind of risk they were in 2008. There are merits to both strategies but they are essentially mutually exclusive and at some point a decision will have to be made. The thinking at this stage is that tighter standards and higher mortgage rates will dominate and it will be left to other programs to keep people engaged in the housing sector.

BIIA comment: The current decline in housing and mortgage originations have already a negative impact on consumer credit information demand, thus when these reforms are instituted the negative impact on information services will be prolonged.

Source:  Armada Corporate Intelligence