Homebuyers could feel the pinch if Congress follows through on plans to shut down Fannie Mae and Freddie Mac, the government-controlled mortgage guarantee giants that were rescued by a $187 billion taxpayer bailout during the financial crisis.
Borrowers would probably end up paying slightly higher mortgage rates under House and Senate bills that would phase out Fannie and Freddie over five years and shrink the government's huge role in guaranteeing mortgage securities. Fannie and Freddie teetered under a crush of massive losses on risky mortgages before being bailed out.
The House Republican bill would virtually privatize the mortgage market. The Senate's bipartisan plan envisions a continued but more limited government role in insuring mortgage securities. Supporters say that would keep mortgages available and affordable.
Congressional efforts to overhaul the nation's mortgage finance system got a boost Tuesday from President Barack Obama's call for changes that are generally in line with the Senate's bipartisan plan.
"For too long these companies were allowed to make huge profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag. It was `heads we win, tails you lose,' and it was wrong," Obama said. "The good news is right now there's a bipartisan group of senators working to end Fannie and Freddie as we know them. And I support these kinds of reform efforts."
The idea behind both plans is to shift more mortgage financing risk from the government to the private sector to prevent taxpayers from having to pay for future bailouts. But there's a price homebuyers would likely pay for having private investors shoulder more risk to protect taxpayers.
"It will mean higher mortgage rates," said Mark Zandi, chief economist at Moody's Analytics. "The question is how much higher."
Typical borrowers could pay about $75 per month in extra interest payments, about half a percentage point, on an average mortgage under the Senate proposal, Zandi estimated, and about $135 more under the House plan. That's on a conforming loan of about $200,000 with the borrower providing a 20 percent down payment.
"You have to assume that almost in any future model being drafted, loans will be more expensive," said David Stevens, CEO of the Mortgage Bankers Association and a former Obama administration housing official.
Most Democrats tend to favor a continued government role backstopping the mortgage market because they say it stabilizes the housing market. Many House Republicans, especially conservatives, want to end government involvement and let the free market rule. Given the split, the rival bills stand as opening markers in a long fight.
"We all agree that the system with Fannie and Freddie needs to be changed," said Rep. Michael Capuano, D-Mass., ranking Democrat on the House Financial Services subcommittee on housing and insurance. "The real question is, do we reform it or kill it the way House Republicans want to."
Rep. Maxine Waters, D-Calif., the ranking Democrat on the Financial Services Committee, said the vast majority of housing industry groups such as real estate agents, mortgage bankers and homebuilders support keeping a government role insuring mortgage securities.
House Republicans, led by the chairman of the House Financial Services Committee, Rep. Jeb Hensarling, R-Texas, say their bill to vastly reduce the government's involvement in the mortgage finance system will be a boon to consumers, spurring competition and innovation in the private sector and giving borrowers more choices. They blame Fannie and Freddie for inflating the market before the housing crash, contributing to the boom-bust cycle.
Hensarling, in a statement Tuesday, said his plan "puts private capital at the center of the housing finance system, ends the bailout of Fannie Mae and Freddie Mac and sustains the 30-year fixed rate mortgage - all goals the president today says he supports."
Hensarling's bill recently cleared his committee without any Democratic votes and is expected to get a House vote in the next few months.
Housing advocates warn that if the government's role is scaled back too far, mortgages could be pushed out of reach for people with lower credit scores and smaller savings for down payments.
They say 30-year fixed-rate mortgages, long a staple of the housing market, could become harder to find and more expensive for borrowers with modest incomes because lenders would be less willing to offer such longer-term loans without government guarantees.
"Those people are now going to be locked out of the system or many will end up paying a premium because of these changes," said John Taylor, chief executive of the National Community Reinvestment Coalition, a housing advocacy group.
Fannie and Freddie own or guarantee nearly half of all U.S. mortgages and 90 percent of new ones. They buy mortgages from lenders, package them as bonds, guarantee them against default and sell them to investors. That helps banks get rid of risk from their balance sheets, freeing up more money to lend.
During the financial crisis, as house prices tanked and foreclosures surged, the government rescued Fannie and Freddie from a flood of defaults on risky loans the agencies had guaranteed, many aimed at providing affordable housing for lower-income borrowers.
Like many banks, the two companies had relaxed their standards on loans they bought or guaranteed during the boom. High-interest loans, some with low "teaser" rates, were given to risky borrowers.
Now under government control, Fannie and Freddie are hugely profitable, and thanks in large part to the housing recovery they're pumping billions of dollars into the U.S. Treasury. Fannie and Freddie have paid the Treasury $132 billion, more than two-thirds of the bailout.
In the Democratic-controlled Senate, a bipartisan bill by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., would gradually replace Fannie and Freddie over five years with a new agency having a more limited role insuring mortgage securities against catastrophic losses.
The bill would create a new Federal Mortgage Insurance Corp. that would provide backstop insurance available only after a substantial amount of private capital is used up. Investors would pay insurance fees to the corporation while agreeing to put a substantial amount of their own capital at risk.
The bill in the GOP-controlled House nearly eliminates the government's role in the mortgage financing system. It would limit the Federal Housing Administration to insuring loans only for first-time and lower-income borrowers.