With the U.S. presidential election just weeks away, broader discussions about solving the nation’s housing affordability woes are taking center stage, much to the relief of many in the housing industry.
If former president Donald Trump were to win a second term, privatizing Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that have been under government conservatorship since 2008, would be a top priority for his administration, according to Mark Calabria, former director of the Federal Housing Finance Agency under Trump.
Calabria reasserted the likelihood of GSE reform during comments at a recent roundtable event hosted by the Community Home Lenders of America (CHLA) in Washington, D.C.
But even if the GSEs go private, what exactly does that mean for the industry and, more importantly, for conventional mortgage borrowers?
The privatization of Fannie Mae and Freddie Mac as they approach 16 years under federal conservatorship has been a hot topic of debate for years. Proponents argue going private would reduce the government’s role in the housing market and promote competition. On the other hand, critics warn it could lead to higher mortgage rates and increased risks to the financial system.
Taking the GSEs out of conservatorship and back into private hands has always been the end goal; Fannie Mae and Freddie Mac were never meant to stay under government control forever, says Taylor Stork, CHLA president and COO of Pennsylvania-based Developer’s Mortgage Company.
Stork points out that when the GSEs were brought into conservatorship in 2008 on the heels of the subprime mortgage crisis, it was never meant to be a permanent solution.
“There seems to be some disconnect and disagreement among people (in housing) of whether or not Congress would need to be involved,” Stork tells RISMedia of the GSEs’ exit strategy. “I would argue that the enterprises have always had a perceived guarantee by the government, whether it is implicit or explicit.”
In his remarks at CHLA’s event, Calabria expressed optimism about prospects for privatization, but he also acknowledged the challenges, both political and economic, to find the right timing and approach to taking the GSEs private.
“There’s a big, huge question mark,” Stork says of what life looks like after the GSEs leave conservatorship. “We haven’t done it, and we have not seen what the markets will do when mortgage-backed securities are guaranteed by a privately-owned corporation that ostensibly does not have any government backing or government guarantee.”
Stork continues: “Right this minute, even without the Treasury buying 90% of the mortgage-backed securities that are manufactured, Fannie Mae and Freddie Mac still continue to be the market leader and dominating force in mortgage-backed securitizations, even though there are plenty of other organizations that can go securitize a mortgage.”
“CHLA has a pretty clear position on this: We have openly and advocated for a pathway to remove the enterprises from conservatorship. We think there are details that are important about what the organizations look like after they’ve been removed from conservatorship,” Stork says.
Stork points out that after the GSEs manufacture MBSs, they’re mostly purchased by foreign investors, wealth funds and other countries. Buyers of those bonds expect safe prepayment speeds and a guarantee that they’ll get their payments because, currently, the U.S. Treasury pays them.
But if investors’ perception of the safety of these investments changes, that could lead to a decrease in the bid prices for those bonds, Stork notes. That could push up the spread price, leading mortgage lenders to increase interest rates down the road, he adds.
Long-term, no one knows exactly what kind of impact that might have on affordability for consumers who are already grappling with high rates and home prices. No matter how the next steps shake out, moving the GSEs out of conservatorship will likely take years.
“This is not something that’s going to happen overnight, day one of a new administration,” Stork says.
