Since September 2008, when the federal government seized both Fannie Mae and Freddie Mac, most lawmakers have remained alarmingly silent about what will happen to the two mortgage giants. The Obama administration has promised in the past to offer a plan for the future of housing finance more than once and has now pushed off any decision until 2011.
Now that the Republicans had a major comeback in yesterday's election it may be extremely difficult to restructure the government-sponsored entities. It would have been difficult enough when one party dominated Capitol Hill to restructure Fannie and Freddie in any meaningful way, but now what will happen is anybody's guess.
HSH Vice President Keith Gumbinger offered a common refrain when asked what the mortgage industry wants out of yesterday's election he said, "Clarity".
The split comes down to two different viewpoints. Liberals favor a system that keeps the government deeply involved in the mortgage market allowing the expansion of homeownership for disadvantaged Americans, while conservatives want the government out of mortgage-finance completely and letting the market to decide its fate.
While economists and taxpayers can debate the pros and cons of either system until the end of time, the mortgage market wants to know two things: How can the market make money and how much money can it make?
Gumbinger says, "Before, money was made by Fannie, money was made by Freddie, money was made by banks, money was made by investors, money was made by brokers. Now, people are just selling mortgages to Fannie and Freddie as quickly as they can before the rules change on them. They're saying [to the government], 'Until I know to what extent you're going to be in the game, I don't know if there's a game to play."
In an April report for the Financial Crisis Inquiry Committee a statistic demonstrates Gumbinger's point quite clearly. During the boom years for subprime-loan origination from 2005-2007, Fannie and Freddie's share of new-mortgage origination went from 57% to 37% in just a matter of just two years.
It was this subprime crisis that lead both Fannie and Freddie into trouble. However by 2009, with taxpayers' backing through the Obama stimulus package, the two firms once again represented a majority of new mortgage business which was more than three-quarters and today they represent nearly as much of the entire mortgage market.
For the new Congress, next year mortgages will be a big question. Just this past August the Treasury Department hosted an event on the future of mortgage finance. Timothy Geithner the Treasury Secretary promised that he will provide the administration's comprehensive strategy next January.
The Republicans will most likely not let Fannie and Freddie continue to exist as they are today and there is even less of a chance for President Obama to sign into law anything similar to what John McCain (R., Ariz.) proposed earlier this year.
James Lothian, a finance professor at Fordham University said, "Obama seems resolute in pushing his agenda. Republicans will resist and many of the Democrats who survived will think twice about following the Obama party line."
So what's next for the mortgage market? In terms of new originations and refinancing things seem to be going just fine. Leaving few loans that wouldn't fit into Fannie and Freddie's new-and-improved standards, banks have shored up their negligent underwriting policies.
Gumbinger continued by saying, "Last year, at this time, [the administration] said by January or February they'd have a proposal for Fannie and Freddie. Then they kicked it down the road 'til the summer. Then after the elections. Fannie and Freddie have been wards of the state for two years now. There's no clarity. There's no clarity or resolution or open debate."
Back in the 1950s, it wasn't rare to pay 20% of a home loan upfront and until a few years ago that practice was an anomaly, but now it has returned with a vengeance.
When the new Congress begins its work in January it will have to decide whether Americans get mortgage loans in the cheap-and-easy fashion of the modern age or go back to the tried and true responsible manner of taking on big debt or will Congress will find an entirely new type of policy?
As Gumbinger puts it, the mortgage market doesn't really care, "They just want to know, 'Can I make money in this business anymore?'"