How financial reform changes the mortgage game

A mortgage application

Jeremy Hobson: There's a hearing in the House of Representatives today looking at plans to renovate -- or tear down, depending on your perspective -- the once-mighty mortgage giants Fannie Mae and Freddie Mac. This comes just as regulators are figuring out new rules to make mortgages safer, as required by the financial reform law.

Marketplace's Economy 4.0 project looks at ways the financial system can better serve more people and our special correspondent David Brancaccio joins us now from New York. Good morning, David.

David Brancaccio: Good morning Jeremy.

Hobson: First of all, David, tell us how the new financial reform law impacts the world of mortgages?

Brancaccio: Here's a concept: skin in the game. If you're a lender, you want to make a mortgage, you should have some of your own capital at risk. If you have some of your own money at risk, maybe you'll be less likely to gamble. But, there are loopholes.

Hobson: Loopholes?

Brancaccio: Well you don't have to have skin in the game for a so-called "safe mortgage." That's if you do an old school 20 percent down payment loan, like in the old days. But the other big loophole is if the mortgage is backed by the mortgage giant Fannie Mae or Freddie Mac, then you don't have to have skin in the game.

Hobson: But Fannie and Freddie are likely to undergo some changes themselves, right?

Brancaccio: The subject of a lot of discussion on Capitol Hill, even as we speak. Yeah, Freddie and Fannie implicated in the entire mortgage meltdown. Many Republicans just hate those quasi-government institutions. I think Senator John McCain once said that they're 'taxpayer-backed slush funds.' We put about $134 billion in taxpayer money into those things. And so in the House of Representatives, there were eight bills this week introduced that will either slowly or more quickly phase out Fannie Mae and Freddie Mac and reduce their influence in power in the mortgage market.

Hobson: And David, what does all of this mean for people who might be looking for a mortgage right now?

Brancaccio: Well there are progressive liberal groups who are quite concerned about the full demise of Fannie and Freddie, saying it could lead to things like the end of the 30-year fixed mortgage -- which might be of concern to many people. But even the Obama administration is talking about significant changes to both those institutions. Republicans and the administration not that far apart. The question is really how quickly this all happens, Jeremy.

Hobson: Marketplace's David Brancaccio in New York. Thanks David.

Brancaccio: My pleasure.

About the author

David Brancaccio is the host of Marketplace Morning Report. Follow David on Twitter @DavidBrancaccio

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