MIAMI — Mortgage rates could rise and the federal government would play a much smaller role in the housing market, according to proposals outlined in a much-anticipated report released Friday by the U.S. Treasury Department.
In South Florida, foreign investors and all-cash buyers have played a disproportionate role in the housing market in the past year, as a tight credit market, high unemployment and a foreclosure crisis have turned traditional home buyers into a minority.
But analysts say those traditional buyers who rely on financing in order to purchase homes will be needed to drive a full rebound in the housing market, and whatever new role drawn up for government-sponsored entities like Fannie Mae and Freddie Mac will be key.
Were going to be impacted more than other part of the country by reforms, said Shari Olefson, a Fort Lauderdale attorney and author of Foreclosure Nation: Mortgaging the American Dream. It certainly is going to be a transition period.
The Treasury Department report laid out three options for reforming Fannie Mae and Freddie Mac, the mortgage giants that have traditionally bought or guaranteed home loans in order to increase the availability of financing in the housing market.
Those options include eliminating the governments role in guaranteeing or insuring most mortgages, providing a government guarantee for private mortgages and creating a new system that would allow for large-scale government involvement only in times of financial crisis.
The report proposes that Fannie Mae and Freddie Mac, which were taken over by the federal government in 2008 and have cost taxpayers $150 billion, should be scaled down and eventually phased out.
In South Florida, where home buyers have complained that private financing remains difficult to obtain, Fannie Mae mortgages have been popular.
I have some very serious concerns with the idea of saying Were going to replace Fannie and Freddie with something private, when the privates werent there when we needed them, said Roy La Fontaine, a Miami real estate broker who is searching for a Fannie Mae-approved condo for his daughter. I find it really hard to imagine a landscape where they dont exist.
Proposed reforms include raising down payment requirements, increasing the price of the governments mortgage insurance and requiring banks to hold onto some of the risk for loans they sell off into the securities market. Each of these changes would likely make getting a mortgage more costly for homebuyers, the report says, but they would also reduce the cost by taxpayers who foot the bill for government guarantees when mortgages go into default.
There are signs that the costs of getting a home loan are already on the risethe average rate for a 30-year fixed mortgage reached 5.05 percent this week, the highest level in eight months, according to Freddie Mac. But most homebuyers in South Floridas troubled housing market dont use financing. In 2010, more than half of South Florida home sales involved all-cash transactions, nearly double the national rate. Still, for those buyers who did obtain a mortgage, about 90 percent took loans with Fannie Mae guarantees, highlighting the importance of government-backed financing in todays credit market.
One reform listed in the report that would take place in October would be a reduction in size of loans eligible for government backingfrom $729,750 to $625,000. That reduction might have a larger effect in South Florida, where average home prices are higher than in other parts of the country, Olefson said. After October, Congress should consider reducing the cap even further, the report said.
The overall scale down of government involvement in housing could take up to seven years, said U.S. Treasury Secretary Timothy Geithner, as Congress would first have to settle on which option to pursue and then implement the plan.
"We are going to start the process of reform now," Geithner said in a statement. "But we are going to do it responsibly and carefully so that we support the recovery and the process of repair of the housing market."
With South Floridas housing market still trying to climb its way back from 50 percent value declines from the 2006 peak, and a gigantic backlog of foreclosure files stuck in court, the implementation of the reforms will likely kick in during a crucial point in the recovery.
Its going to be at least a year before we find out what the plan is going to be, Olefson said. And a couple years after that before we begin to see the full impact.
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