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Fannie Mae, Freddie Mac replacement could hinder housing recovery

Posted on Tuesday, March 18, 2014 at 9:19:45 AM

Fannie Mae and Freddie Mac have quickly become the center of attention in Congress, as talks about how to overhaul these government-sponsored enterprises have gained steam as of late.

According to the Los Angeles Times, bipartisan efforts to address this residential financing system have moved forward recently. A new proposal would slowly eliminate both Fannie Mae and Freddie Mac, replacing them with a smaller government program designed to guarantee mortgages. Both organizations entered bankruptcy in 2008 following the peak subprime lending era.

However, these potential changes could cause problems for the U.S. housing recovery, according to Bloomberg. Market disruptions could start to appear as the elimination of Freddie Mac and Fannie Mae moves forward. For example, residential financing rates could increase, underwriting standards could get tougher and homeownership rates might decline.

"It certainly slows the rate of recovery," Kevin Chavers, a managing director at BlackRock Inc., told Bloomberg. "It raises the question of what the implications are for the recovery as you raise costs and reduce the universe of people eligible to participate."

Even so, there is sentiment within Congress that no plan will be passed unless it ensures affordable loan options and low-income rental housing for Americans, the media outlet noted.