LIVINGSTON: Home loan blues and bonds

Published: Thursday, August 15, 2013 at 04:52 PM.

Remember Newton’s Third Law of Motion — every action has an equal and opposite reaction? Proposals curtailing Freddie Mac and Fannie Mae (Federal Home Loan Mortgage Corporation and Federal National Mortgage Association) will have an equal, opposite and perhaps unexpected reaction. 

In an area dependent on real estate sales, be mindful of your prayers, they may be answered.

Alone among developed nations, the United States offers 30-year, fixed-rate mortgages. U.S. borrowers can choose long-term, fixed-rate mortgages since Freddie and Fannie, not their lender, own most mortgages.  By selling mortgages to these government sponsored enterprises (GSE), your local bank does not carry the liability on its balance sheet and can make additional loans.

Passing the loans to Freddie and Fannie increases liquidity and allows for lower interest rates. You may have built it yourself but GSEs subsidize interest rates.  

Thirty year mortgages won’t vanish but they will cost more, perhaps substantially more. Bill Gross, the bond guru, warned rates would shoot up three percentage points without GSE involvement.

The Cato Institute’s Mark Calabria believes Gross overstates his case and predicts rates escalating up to one percentage point if government support ends. Calabria referenced jumbo mortgages, covering mortgages $417,000 or higher, which have slightly higher interest rates than conventional Freddie Mac/Fannie Mae loans. Note: Freddie Mac/Fannie Mae limits vary depending on local home prices. 

With a 4.25 percent interest rate, the principal and interest payment for a $240,000, 30-year mortgage ($300,000 sale/20 percent down) will be $1,190.06. Bump rates up one percentage point, the principal and interest payment jumps almost $150 ($1,337.91). If Gross is correct, not a huge reach, then multiply three times. Borrowers could also pay additional hidden fees akin to Federal Deposit Insurance Corporation (FDIC) premiums. A Senate bill proposes a Home Mortgage Insurance Corporation much like the FDIC.  

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