Tuesday, August 16, 2011

Government's Role in the Mortgage Industry

A major portion of the recession involves the mortgage market. The mortgage market is also crucial to the recovery efforts of the US economy. With S&P's recent downgrade of Fannie Mae and Freddie Mac, the Obama Administration is looking to use the role of government to strengthen the industry and aide in the recovery efforts. Along with the Federal Reserve Bank's pledge to maintain the current historically low interest rates through 2013, its time we find away to revamp this jilted industry and save American homeowners from the foreclosure monster.

President Obama is working with his economic policy advisers to build a plan that would restore and strengthen the mortgage industry. The administration feels that government in this case, should use its power to make the necessary changes to restore and strengthen the industry, making it less likely to falter again and making it work for the consumers and overall market. The mortgage industry of the past was tweaked and deregulated so much that it was able to trick consumers and the market into thinking that it was working for them and it wasn't. If you think back to 2005-2006, the market was trading somewhere between 13.0 -14.0K points on the Dow and consumer spending was quite heavy. The mortgage industry took a shift, where people no longer used their homes as the long-term investments they were intended to be, but used them as ATM's - Home Equity Lines of Credit and Mortgage Refinancing. This not only tricked the homeowner/consumer, but tricked the markets as well, and in my opinion created a fake economy.

Per The Washington Post:

A decision to preserve a major government role would mark a big milestone in the effort to craft a new housing policy from the wreckage of the mortgage meltdown and could mean a larger part for Fannie and Freddie than administration officials had signaled.

In a statement, the White House said it is premature to say that senior officials have agreed on any of the three main options outlined earlier this year in an administration white paper on reforming the housing finance system.

“It is simply false that there has been a decision to move forward with any particular option,” said Matt Vogel, a White House spokesman. “All three options remain under active consideration and we are deepening our analysis around how each would potentially be implemented. No recommendation has been made to the president by his economic advisers.”

The proposal is likely to draw criticism from many Republicans, who blame the financial crisis on policies they say overly encouraged the housing market. And many economists, including some who have worked in the White House under Obama, consider the federal role harmful to the free market.

But if this approach became law, it probably would keep in place the kind of popular home loans that have been around for decades — 30-year fixed-rate mortgages with relatively low interest rates.

It's important that this administration see and understand the importance of fixing the mortgage industry. Yes, there have been programs introduced to help homeowners scave off foreclosure, but I don't think enough has been done to make the necessary changes to the industry as a whole. We need to take the trickery out of the industry and bring back the days of 20% down payments and a simple 30-year fixed rate mortgage.

What needs to be done to restore the mortgage industry?
What changes would you like to see made to strengthen the mortgage industry?
Do Fannie Mae and Freddie Mac need to play any further role in the mortgage industry?
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