Everything has sounded pretty rosy for the housing market as it has become the focus of hope for the economic recovery.
But the housing finance system isn’t shining quite as brightly. There’s still the matter of what to do about Fannie Mae and Freddie Mac. And the majority government ownership of mortgage loans still inhibits private sector lending.
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One plan is to replace Fannie Mae and Freddie Mac with a government agency that would offer reinsurance to mortgage-backed debt, something firms would have to pay for.
The plan would minimize government backing of the mortgage market but would not shield investors against another housing market downturn.
This highlights the question of whether it is possible to have a housing market without government backstops or a 30-year fixed-rate mortgage with no prepayment penalty.
Experts say it is likely not possible to have both.
This type of long-term financing is rarely available in other countries. Shorter-term and variable rate mortgages are much more the norm and other countries do not have entities like Fannie Mae and Freddie Mac.
The point is that any plan to repair the ailing housing finance system
must admit that fixed-rate mortgages come at a high cost.