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How Will GSE Reforms Affect Borrowers?

According to the Congressional Budget Office’s (CBO) August 2018 update report titled “Transitioning to Alternative Structures for Housing Finance,” mortgage interest rates are likely to go up, given the market structure analyzed by the CBO. New structures aimed at the secondary market, primarily Fannie Mae and Freddie Mac, may lead to small increases in interest rates, but not impact home prices.

CBO also notes that even if restructuring the secondary market and the GSEs were to result in higher interest rates, the rise would still likely be smaller than typical yearly fluctuations in rates. The goal of restructuring would be to become more reliant on private capital than the secondary market, which is currently mostly controlled by the GSEs. Rising rates would be caused by smaller federal subsidies and firms charging market prices for rates due to risk. Rising rates would inevitably result in rising home prices as well, but as previously mentioned, the rate rising level may not be enough to make a difference.

According to CBO, mortgage interest rates would only rise modestly for two reasons. First, the current guarantee fees from Fannie Mae and Freddie Mac are not far off from the fees from private guarantors. Second, the impact of unlimited federal guarantees, instead of the current $254 billion limit in federal guarantee losses, could positively impact the liquidity of the secondary market, reducing rates instead of raising them.

The increased mortgage rates would slow the rate of home value increases, according to the CBO. Additionally, restructuring may impact the availability of 30-year fixed rate mortgages, depending mainly on the “robustness” of the securitization market. However, the relatively high liquidity of the market from the unlimited federal guarantees would likely mean 30-year fixed rate mortgages would still be widely available, with or without government backing.

With a more privatized secondary market, with the government acting as a last resort and not a primary investor, could also result in a lower number of investments in housing. The CBO notes that overinvestment was one of the primary causes of the foreclosure crisis, and shifting capital from housing to other pursuits may strengthen the economy.

Find the full report here.

About Author: Seth Welborn

Seth Welborn is a Harding University graduate with a degree in English and a minor in writing. He is a contributing writer for MReport. An East Texas Native, he has studied abroad in Athens, Greece and works part-time as a photographer.

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