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White House Mortgage Reform Proposal: Impact On Consumers

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The White House and the U.S. Treasury Department recently rolled out a 32-page white paper detailing the reforms the Obama administration wants for the U.S. mortgage industry. Basically, Uncle Sam wants to get out of the mortgage lending business, and let private lenders step in to fill the breach.

In a nutshell, the report points to some big-ticket changes for the $10.6 trillion mortgage industry. Among them:

• Fannie Mae and Freddie Mac will be wound down and ultimately be out of business. The government wants to pare back its role in the mortgage sector, and cede more authority (and business) to private lenders. It will remain in the business of getting affordable home loans into the hands of low-income and moderate-income homebuyers.

• The government also plans to step up its oversight efforts to make sure that American homebuyers – especially low-to-moderate-income Americans – are getting a fair deal from their mortgage lender.

Those are two fairly big impactors for consumers. But they’re not the only ones. Here’s a deeper look at how the White House mortgage reform proposal may affect consumers.

1. Consumers increasingly will turn to big banks for mortgage aid

With Fannie and Freddie on the way out, homebuyers will have to look elsewhere for mortgage help. It’s a big shift. Right now, Fannie and Freddie account for around $1.5 trillion worth of U.S. mortgage debt. Taxpayers have also poured $150 billion into both government sponsored enterprises (GSE’s) since 2008. Now, big banks like Citibank, JP Morgan Chase, and Bank of America will be much more of a focal point for consumers.

2. The cost of mortgages could rise

With less of a government presence in the mortgage market, expect things like fees and closing costs to go up. Also, big private lenders may hike mortgage rates due to lack of competition from the public sector.

3. Expect tighter credit

Private lenders have been ultra-stingy about providing home loans to customers since the start of the Great Recession. That trend should accelerate as bigger banks and mortgage lenders begin calling the shots. If you don’t have a decent credit score, expect to pay more in terms of interest rates to get that home loan.

4. Higher home loan down payments

Federal Housing Administration home loans could change, too. Normally, borrowers could expect to put down as little as 3.5% on an FHA home loan. But the White House plan would raise that minimum down payment to 10%.

5. Loan limits will be changing

The Obama administration wants to reduce the ceiling on home loans. Currently, Fannie and Freddie guarantee mortgages in expensive parts of the country up to $729,750. If approved, that ceiling would drop on October 1st to $625,500. Getting a loan higher than that will be a tough task.

Treasury Secretary Timothy Geithner says the mortgage reform proposal is “a plan for fundamental reform of the housing market,” but adds that “we’re going to proceed on this path of reform very carefully.”

Carefully or not, it is a new path for the government – and for consumers looking for a home loan. Expect big changes to come down the road – to a mortgage near you.

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