Investeens

The goal of Fannie and Freddie is to make housing affordable.  It's a simple concept, but new mortgage lending rules may prevent them from accomplishing this objective.  The new rules, if enacted, will require that banks maintain partial ownership (5%) of the loans that they used to sell off completely. If the loans they sell go bad, the banks will feel it because 5% ownership of the many loans it writes and sells amounts to a lot of risk.

The way that banks can avoid this "risk retention" requirement is to require homeowners to pay 20% of more of the purchase price in cash.  These "prime" mortgages can be sold off completely by the bank which made it.

As with almost every law, there are both critics and supporters.  Attackers of the new rules say that it will raise borrowing costs and prevent the middle class from getting affordable mortgages.  Supporters claim that it will make the housing market more liquid (how easily a person can convert his/her housing investment to cash) and that it will only apply to a small portion of the housing market.  

How will these new rules affect Fannie and Freddie? Well, not dramatically, at least initially.  Because Fannie and Freddie are backed by the U.S. government, they will be exempt from the new rule.  Them and other government agencies back 90% of all new mortgages, so creating they already have plenty of risk if homeowners dont' make their mortgage payments.

Perhaps the new rule can create a more stable housing market.  It will encourage prime mortgages to have signficant safety guidelines and may make the housing market more liquid.  On the other hand, if rates go up because banks must retain risk, then the average homebuyer will find it harder to afford a home.

See Regulators Unveil Mortgage-Lending Rules for more info on the new rules.