Are You Ready For This?
Pimco's Bill Gross estimates mortgage rates would rise 300 to 400 basis points without government owned Fannie Mae and Freddie Mac assisting the housing market.   This is because the two agencies guaranteed, through mortgage purchases and subsequent inclusion in mortgage backed securities, 95% of the mortgages created during the past year.  Fannie and Freddie don't guarantee a borrowers mortgage payments, which would create moral hazard, they buy mortgages from banks and include the mortgage in huge mortgage pools, which are sold as bonds.  Fannie and Freddie therefore guarantee the bonds, not the underlying mortgages. 

Without the agencies' mortgage securitization program, there would be much less capital for mortgage lending.  Banks would have to hold the mortgages in their portfolio, leaving much less capital for new mortgages, and borrowers would be subject to strict underwriting due to limited capital.  This makes the assumption that private mortgage securities would not replace the agencies' role of buying mortgages from banks.  But even if private mortgage pools emerge, it is unlikely they'd completely fill the void of the agency debt, and they would not have the guarantee of agency debt.  I have been telling people that while no one likes the idea of government in the mortgage business, are they ready for mortgage rates 300 to 400 basis points higher than current rates?  This weeks' poor housing numbers would look like like boom times compared to numbers if long term mortgage interest rates suddenly jumped from 4.5% to 8.5%.  The price adjustment to housing would obliterate the economy and wipe out the wealth of even those that did not buy in the bubble period of 1998 to 2007.