Don’t fear end of Freddie and Fannie.

President Obama and both houses of Congress are calling for an end to Fannie Mae and Freddie Mac, the two government owned entities that guarantee most of the home mortgages in the U.S.  Real estate agents, home builders, mortgage brokers, wall street bankers, and others who have a vested interest in keeping our government in the mortgage guarantee business are scared to death.  They have all become so addicted to government guarantees that they can’t imagine a world without them.

When Fannie and Freddie are closed down, and private lenders are left to decide what risks they will or will not take, It is likely that 30 year fixed interest rate mortgages will become more difficult to obtain.  It is also likely that when lenders risk their own money, they will want things like significant down payments, accurate appraisals, and borrowers who have a proven ability to make the monthly payments. ( Back in the olden days, before government guarantees, mortgage bankers used to do something called “underwriting” before deciding whether or not to make a loan – you can look it up on Wikipedia.)

Still, there are businesses such as life insurance companies, annuity companies, pension plans and others that need to invest large sums for long periods of time in secure investments like home mortgages.  So, there is no reason to believe that mortgages will not be available in a private market.

It may be that mortgages in the future will have fixed interest rates for only 10 to 15 years, and will need to be refinanced at the end of that time.  But, the monthly payments can still be based on a 30 year payoff schedule.  This has been the situation in parts of Europe for many decades.  There is a risk to the home owner that interest rates will be significantly higher at the time of refinance, but the principal balance will be paid down significantly, so the risk of having to make significantly higher monthly payments fairly low, and the ability to get a refinance should be fairly easy.

So, don’t believe those who have a vested interest government guaranteed mortgages when they tell you that housing markets will fall apart if Fannie and Freddie cease to exist.  Fannie and Freddie still allow all of the players in the home mortgage marketplace to shift much, if not all, of their risk to taxpayers.   If Fannie and Freddie had never existed, it is likely that we never would have had the housing crisis and the great recession that followed.  When people are required to pay for their own mistakes, people make fewer mistakes.  We need to get our government out of the mortgage guarantee business.

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