Fannie Mae and Freddie Mac may seem like distant galaxies, light years from our world as we know it.
But the proposals last week by the Obama administration to phase them out could have a profound affect on all buyers and sellers as early as this year.
To be sure, a proposal is a long, long way from congressional action, and self-interested parties such as the Mortgage Bankers Association already have slung arrows at the notion of restricting the government’s role in backstopping the mortgage industry with the money you pay in taxes.
However, less conflicted columnists and analysts such as Gretchen Morgenson in the New York Times have said unequivocally that it’s time for a change. Among many others who have weighed in include my friend, crack real estate lawyer Ron Gitter and the Wall Street Journal, which published a cool graphic.
According to real estate columnist Ken Harney, as well, the proposals could have wide-raning effects. Says he:
Fannie and Freddie are toast for the long term. But some homeonwers probably are going to get burned in the short term.
Ironically, as a real estate broker who has seen his investment in Fannie Mae evaporate, I agree with Morgenson and others; surprisingly and disconcertingly to me, I find myself uncharacteristically aligned with economic conservatives.
At issue are several major, not irrelevant, concerns.
One among many is that the cost of borrowing will rise by an undetermined amount, with estimates ranging from fractional to multiple percentage points of interest.
Second, the rising monthly cost of carrying a mortgage could derail any semblance of housing’s and thus the economy’s recovery.
Third, this nation has legislated a social policy that supports homeownership as realization of the “American Dream.” The promise that everyone should be able to buy a home will be broken.
Taking the last concern first, I frankly do not understand why the deeply leveraged purchase of a home always is the best investment in an asset for citizens at any income level or why renting always is a less desirable way for Americans to enjoy shelter.
With respect to the fragile housing market and weak economic recovery that we are experiencing, the proposals rest soberly on a foundation of gradual and carefully calculated implementation over a number of years. If abruptly applied, the measures would wreak disaster. And bear in mind that the administration can make many of the changes without congressional action.
True, if the cost of borrowing rises, it follows that the price of real estate must decline. But how far and how fast?
Every time taxi fares increase in New York City, passenger usage falls off–before it rises to its previous level. I view any unknowable boost in borrowing costs as analogous, but as I often say, I’m no economist.
There no doubt will grow a volcanic fury of opposition to the administration’s report on Fannie and Freddie and any amount of debate on Capitol Hill (if little action). At the same time, I am hopeful that rational voices will prevail.
Because one recommendation comes first, it likely will receive attention early. It involves lowering the ceiling for jumbo conforming loans in high-cost markets such as Manhattan from $729,750 to $625,000 this very year.
Meantime, expect to see much more written and discussed about the proposals. If the outcome matters to you–and surely it does matter to all of us–it is more important to have a say in a fair solution to the Fannie/Freddie dilemma than to sit out the fractious arguments that to which, inevitably, we will be subjected.
It is high time that the meaning of the “American Dream” be questioned and that the most benefit accrue to the biggest proportion of our citizenry, recognizing that there’s nothing inherently bad about renting and change always will be resisted.
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022