The Obama administration is pressing to scale back the federal government's role in the mortgage market. On Friday, it presented Congress with several proposals that would raise the costs of federally backed loans, a move designed to help the private sector better compete with Fannie Mae, Freddie Mac and the Federal Housing Administration. Here are some highlights from the administration's report:
-NOW: Fannie Mae and Freddie Mac negotiate "guarantee fees" with lenders. Those fees are usually included in the interest rates paid by borrowers. When borrowers fall behind or default on their mortgages, Fannie and Freddie use these fees to pay their mortgage bond holders. As for the Federal Housing Administration, it charges borrowers an annual premium that is used to compensate lenders for loans gone bad.
- LATER: The administration proposes raising guarantee fees over the next several years, which would boost interest rates on loans backed by Fannie and Freddie. Starting April 18, the FHA will raise its annual premium by a quarter-percentage point. For the vast majority of loans, the premium will rise from 0.9 percent to 1.15 percent. That means that a borrower who takes out a $170,000 mortgage (the average FHA loan size) would pay an extra $34 a month.
- NOW: High-cost housing markets, including the Washington area, have a three-tiered mortgage system. The lowest interest rates apply to 30-year fixed-rate mortgages that do not exceed $417,000. Higher rates apply to loans between $417,000 and $729,750. The highest rates apply to "jumbo" loans that exceed $729,750. Jumbo loans are not backed by Fannie Mae, Freddie Mac or the FHA, but those other categories carry federal guarantees.
- LATER: Starting Oct. 1, the maximum size of mortgages backed by the federal government will drop to $625,500 in these expensive housing markets. It might drop even further in the future for loans insured by the FHA. Based on this week's average rate, a borrower who takes out a $650,000 loan today would be charged 5.25 percent interest, according to HSH.com. If the lower loan limits were in effect, the same borrower would be charged 5.72 percent. That would increase the monthly payment by $191.52.
- NOW: Fannie Mae and Freddie Mac generally demand at least 5 percent down from borrowers with private mortgage insurance. (Lenders require this insurance if the amount borrowed covers more than 80 percent of the value of the home.) The FHA requires borrowers to put down at least 3.5 percent, though it imposes a 10 percent down payment for borrowers with credit scores below 580.
- LATER: The administration supports gradually raising the down payment requirements to at least 10 percent for loans backed by Fannie and Freddie. The FHA may also ask for larger down payments, possibly raising its minimum to 5 percent.
MORTGAGE INTEREST DEDUCTION
- NOW: The mortgage interest deduction allows homeowners who itemize their deductions to reduce taxable income by the amount of interest they pay on their mortgage. Experts say the policy favors upper-income homeowners who own larger homes. A presidential commission has recommended scaling back this tax break.
- LATER: The administration's report did not address this hot-button issue except to say that the mortgage interest deduction "can encourage investment towards housing over other sectors in the economy."
- NOW: When troubled borrowers are trying to modify their loans, those who have a second mortgage, such as a home equity line of credit, often face the toughest hurdles. That's because the second lender tends to suffer huge losses when a loan is reworked and often rejects any proposed modification.
- LATER: The administration proposed that when borrowers take out a loan, the mortgage documents lay out a process for modifying second loans in case the borrower falls behind on the first mortgage.