Will 30 Year Loans Survive Dismantling of Fannie and Freddie?

Speculation has ramped up in recent weeks about what changes might be made to the US home-purchase landscape if federally-run mortgage giants Freddie mac and Fannie Mae are shut down. Many have speculated that the popular 30 year, fixed-rate mortgage could become a luxury product after having been a staple of American homebuying since the 1950s.

Interest rates wold likely rise for all buyers if Fannie and Freddie go away, but insiders say that rates would climb more for urban and rural homebuyers than for the coveted surburban customers. Lenders could begin charging fees for a number of popular features now taken for granted, such as the ability to “lock in” an interest rate weeks or months before signing a contract to buy.

The dissolution of Fannie and Freddie is a rare, common goal of the Obama administration and House Republicans, though most experts agree that it’s a goal that’s still a long way off from being realized. Congress must come to an agreement on a plan, likely years down the road, and then a long process of weaning the housing market from dependence on the two government-controlled entities would have to be undertaken.

Fannie Mae and Freddie Mac, originally created to increase the availability of home loans, misused federal support to enrich shareholders and executives by backing billions of dollars in bad loans. The two companies were on the verge of bankruptcy when the financial collapse hit, and were seized by the government to prevent their failure. The two have so far required a staggering $135 billion in taxpayer aid to remain solvent.

Discussions are ongoing about what level, if any, the government would have in the mortgage industry if, and when, Fannie and Freddie are dissolved. Some legislators want the government’s involvement to be scaled back, allowing the market to dictate terms and costs, while others insist that the government will have to continue to be involved on some level.

Also up for discussion, meanwhile, are the very basics features of home loans: interest rates and repayment periods.