A makeover for Fannie and Freddie: what would it mean for borrowers?

The mortgage giants Fannie Mae and Freddie Mac languishing in financial limbo for years. In the latest effort to chart a long-term path for Fannie and Freddie, a politically powerful business group is calling for the restructuring of mortgage companies into a shareholder-owned utility.

Fannie and Freddie are mostly invisible to homeowners, but they play an important role in the mortgage market. By acting as a safety net for private lenders, Fannie and Freddie keep borrowing costs low and mortgage money flowing.

The National Association of Realtors supports the utility type arrangement. Under NAR’s proposal, Fannie and Freddie would operate as regulated monopolies, the housing sector equivalent of Commonwealth Edison or Florida Power & Light.

“The structure we are proposing promotes competition, but it also promotes stability,” says Susan Wachter, an economist at the Wharton School at the University of Pennsylvania who worked with NAR on the proposal.

The Realtors business group is drawing attention to its proposal at an uncertain time for Fannie and Freddie. The Trump administration had hoped to return the entities to private ownership, but lost power before achieving that goal. President Joe Biden appears less keen on further privatization.

What Fannie and Freddie are doing

Fannie and Freddie do not lend directly to home buyers. Instead, the two “government-sponsored companies” buy mortgages from lenders and then bundle the loans into securities that are sold to investors. Fannie and Freddie pay off about half of the $ 11 trillion outstanding mortgages in the United States

While they typically go under the radar of consumers, their underwriting policies sometimes become obvious to borrowers. For example, last year Fannie and Freddie tighten the rules for independent borrowers. In another response to the coronavirus pandemic, Fannie and Freddie began in December to impose a new “unfavorable market chargesOn mortgage refinancing.

While realtors, lenders and consumer advocates criticized the fees, the regulator overseeing Fannie and Freddie said the fees were key to strengthening the nation’s mortgage market.

“It’s critical to remember that these fees cover losses resulting from policies that have helped millions of Americans stay safe in their homes during a global pandemic,” Federal Housing director Mark Calabria said last year. Finance Agency.

The collapse, rebound of Fannie and Freddie

During the housing bubble of 2004-2007, Fannie and Freddie entered into subprime loans. This strategy deteriorated when house prices in the United States collapsed.

Rather than let Fannie and Freddie fail, the US government took them over in 2008, an arrangement known as trusteeship. In the years that followed, house prices rebounded and mortgage markets regained their health.

Still, the fate of Fannie and Freddie is uncertain. Calabria, former chief economist to former vice-president Mike Pence, took over as head of the Federal Housing Finance Agency in 2019. Its mission was to privatize the two credit giants.

For Calabria, the lessons of the crash were important. He said last year that Fannie and Freddie were “not that close to safety and solidity.

“In their current state, Fannie and Freddie will fail in a severe housing downturn,” Calabria said.

These concerns led the FHFA to establish new capital rules for Fannie and Freddie. The companies had only been allowed to keep just $ 45 billion in profits, with any more going into the treasury. In November, the FHFA raised this amount to 280 billion dollars.

A wave of ideas, but no solution for the moment

It’s unclear exactly how a restructuring of Fannie and Freddie would affect consumers. But creating a more stable structure for Fannie and Freddie will put the entities in place for long-term success, says Ken Fears, NAR’s mortgage finance policy expert. While mortgage borrowers have benefited from extremely low rates and reasonable fees, Fears says uncertainty looms beneath the surface.

“It’s not certain that what we have today can survive in the long term,” Fears says.

The concept of public service is just the latest proposition to gain traction in Washington. Don Layton, the former chief executive of Freddie Mac, said the mortgage giants have been in a “political greenhouse” since the Great Recession. Policymakers and mortgage experts have launched a variety of proposals. Among the ideas considered and rejected were an industrial cooperative, permanent government control, and the creation of a number of competitors for Fannie and Freddie.

“We went through a lot of gyrations,” says Layton.

Not everyone thinks the structure has to change. Ed Golding, former head of the Federal Housing Administration and now executive director of the MIT Golub Center for Finance and Policy, says the current program is working well.

“People say guardianship can’t last forever,” Golding says. “I say why not? “

In any case, Golding says it’s not clear how a utility-style structure will benefit consumers. He says proponents of the proposal should refine their pitch.

“I think they can better explain why it cuts costs,” he says.

Wachter, for his part, is considering Fannie and Freddie’s new look attracting investors by promising a stable dividend. “There are investors who prefer stability, and they will pay for it,” she said.

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