The New York Times recently published an article discussing what might happen to the lending market if the government formally elects to shut down Fannie Mae and Freddie Mac in the coming years. The loss of these two government-run lending powerhouses, the article supposes, could signal the end of borrower luxuries like low interest rates, rate locks and the 30-year mortgage.
It's an interesting thought, and a debate worth examining today since it appears likely that the end is near for Fannie Mae and Freddie Mac. Even Treasury Secretary Timothy Geithner has openly recognized the need for reform, despite the political ramifications normally associated with any type of government reform.
It's been suggested that both Fannie and Freddie are eased out of existence for the betterment of the financial market. The exact term Geithner used was "elegant funeral" although others have suggested a more immediate exit. In either case, one thing is clear: it will become more challenging to obtain a mortgage.
Particularly if the 30-year mortgage becomes a rare "luxury item" there will be fewer candidates for a loan, thus severely hampering the number of people who can obtain financing. Research also indicates that the departure of Fannie and Freddie would hinder minorities the most.
The path to closing Fannie and Freddie should be a careful one. Although fully privatizing the lending marketplace is inevitable, strong consideration must be given to the likelihood of qualifying for a loan given today's economic climate, not a future ideal. The goal should be to create a system whereby individuals and families can qualify for reasonable loans that they can pay for. Eliminating a standby like the 30-year mortgage is not going to help that goal.