As of now, the housing market offers some of the lowest refinance rates ever. These exist due to a combination of the state of the world financial markets and due to the policies of the United States government. In this season of political change, though, there are a number of proposals and political realities that could change the atmosphere greatly for homeowners looking to replace their mortgage with a more attractive one.
The Abolition of Freddie Mac and Fannie Mae
Government-sponsored entities, frequently referred to as the “GSEs,” are currently responsible for 90 percent of the money that gets lent out as mortgages, based on an article in the New York Times. When a homeowner gets a mortgage, their lender sells the mortgage to Freddie or Fannie. Freddie or Fannie then package large blocks of mortgages into bonds, and sell the bonds on the global financial markets to investors. Since bonds issued by Freddie and Fannie carry an implicit guarantee from the U.S. Government, investors will buy them at low rates of interest, making it possible for mortgages to be made at very low rates.
Politicians ranging from Barack Obama on the left to Ron Paul on the right have called for the abolition of these organizations. The problem with them is that they expose the government to a great deal of risk, since the government is ultimately responsible to bail them out. In addition, their role in the market distorts the true market for mortgage debt. If their role is abolished or cut back, private mortgage lenders will make more, if not all, of the loans in the market. They will likely demand higher rates of return on safer investments, leading to more expensive refinances at less attractive terms.
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