I think I might have misplaced my Fannie

I was enjoying a cup of coffee with a friend the other day whose only involvement in the housing finance system is that her family makes their mortgage payment on time every month. She told me about a family whose closing on a new home was canceled three times because the lender needed more than 45 days to document and approve their loan.

My thought was, “And this is how the housing finance system functions with hundreds of billions of taxpayer dollars greasing the gears.”

Fast forward to February 11th. The Administration released its report on options to reform the housing finance system.

On Capitol Hill, Republicans commended the Administration for its commitment to wind down Fannie Mae and Freddie Mac, but groused about the lack of a concrete plan. Democrats were happy that support for affordable rental housing featured heavily in the report, but didn’t exactly go out of their way to congratulate the Administration for its other ideas.

On K Street, the mortgage bankers were glad to see the Administration wants the government involved in the mortgage market. I’m sure private mortgage insurance companies were buying crates of champagne. Meanwhile, the Realtors asked the practical question, “How’s this all supposed to work?”

Battle plans are being drawn up in Congress and around the country as the countdown to the epic struggle over housing finance reform begins. What most folks should be realizing now (if they haven’t figured it out yet) is that reform has already started.

At a February 16th hearing in the Subcommittee on Insurance, Housing, and Community Opportunity, Federal Housing Administration Commissioner David Stevens couldn’t complete a thought without mentioning how FHA has ratcheted up the pressure on homebuyers and homeowners this past year.

First up was the announcement of a new 25 basis point increase in FHA’s annual insurance premium, which comes on the heels of two other premium increases. Next, Stevens listed ways FHA has pushed homeowners out of its programs by making them more restrictive. The icing on the cake was Commissioner Steven’s plea for Congress to allow loan limits to fall.

In response to a question by Rep. Dold (R-IL), Stevens said the primary goal of these policies is to substantially reduce FHA’s footprint in the housing market—specifically from 30 percent down to around 15 percent. And Stevens happily shared that it’s working. Citing a report by Inside Mortgage Finance, Stevens noted FHA’s market share from the 1st quarter of 2010 to the fourth quarter of 2010 declined from 24 percent to 14.8 percent.

That is housing finance reform in action now. Game on.

FHA isn’t the only one at the party though. The Administration has announced it will urge (require, actually) that Fannie Mae and Freddie Mac increase guarantee fees and increase minimum downpayments for loans it purchases. Conforming loan limits will be coming down, too.

Is this bad? No. In fact, this is likely the only way we can prevent giving Fannie and Freddie even more cash than we already are and stop FHA from being added to the list of government bailouts. And that’s what brings me back to my friend.

How is the average American family that still owns a home going to react when all of this hits them in a very personal and practical way? If you still have a job or still own your home, it’s not just because of sheer dumb luck. You had to have done something right in the years leading up to and during the financial meltdown. How are these people going to react to paying for the sins of others?

That question will be answered soon. Government support for the mortgage market is diminishing. The Administration’s report shows that trend will not only continue, but accelerate. Even if Congress does nothing on housing finance reform, the mortgage market will look a lot different in 12 to 18 months than it does today.

If the Administration gets it wrong this next year and runs into a public that’s not so sure it wants to put 30 percent down on a mortgage with a higher interest rate, what are the chances of structural housing finance reform making its way through Congress? The country can’t afford to simply swap one Fannie for another.

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