Could this be the End of the 30-year Mortgage?

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In recent days we heard a lot about raising the debt ceiling and the government shutdown. However there is a debate looming on the political horizon which concerns the  majority of home-buyers. I am talking about the reform of the secondary mortgage market. I have listened to this for a little while, have you heard about it? Since I am in the real estate business, I listening and learning about a lot of things which may directly or indirectly impact the consumer. This is one of those things. I haven’t heard much about it in the main stream media, so I thought I would share with you what I have learned so far, because it could have a dramatic impact on everyone.

Before we dive into this, I think it might be a good idea to talk about some of principals all of this is based on. You probably know this, but when you purchase a home and bank “X” gives you a loan, that loan is secured by Fannie Mae or Freddie Mac. Your mortgage is sold to investors, often times before you even close on your house. Your mortgage is now on the ‘secondary mortgage market’ . These investors buy mortgages in bulk, they are concerned with interest rates, not credit ratings because your mortgage is guaranteed by Freddie or Fannie. You may have heard of Ginnie Mae? Ginnie Mae is the Fannie Mae-equivalent by the FHA, VA and the Rural Housing Service.

If there are no more guarantees from Fannie, Freddie and Ginnie, the stakes get too high for investors, they can’t afford the risk of a 30 year mortgage without any guarantees. That means they will not buy them from the banks anymore, the banks in turn will have to adjust and therefore shorten the term of the loan. How short? I don’t know, maybe the longest term would be 15 years, maybe shorter? Whatever is profitable for investors….

The federal guarantee is key to 30-year, fixed-rate financing, because, again, investors are looking for pools of loans at various interest rates because that’s what they’re managing: interest-rate risk.

Here is a short video interview with Ted Tozer, Ginnie Mae president. Take a few minutes to watch it, he explains the implications very well.

Ted Tozer, President of Ginnie Mae, explains the secondary mortgage market:

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