What role do Fannie Mae and Freddie Mac play in the U.S. mortgage market?
What role do Fannie Mae and Freddie Mac play in the U.S. mortgage market?
The Trump administration has made some changes to two pillars of the American housing market: the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Or, as they’re better known, Fannie Mae and Freddie Mac.
Last week the administration fired 14 members of the boards of directors at the two corporations. Fannie and Freddie have been under government-run conservatorship since the late 2000s housing crash, but the White House is reportedly considering a plan to re-privatize them.
Fannie and Freddie do not lend people money to buy homes.
Instead, they buy mortgages from the lenders that originate them, so those loans — and the risks associated with them — are no longer on those lenders’ books.
Then they bundle up the mortgages into neat little snackable securities, and then sell those snacks to pension funds and insurance companies and other big investors around the globe.
“They’re important because they’re the grease basically that makes the whole mortgage finance system work, and they’ve been incredibly successful at it,” said David Dworkin, CEO of the National Housing Conference, which pushes for more affordable housing.
Fannie and Freddie’s big value-add is the federal government acting as a backstop. If a homeowner defaults on a Fannie or Freddie-backed mortgage, the investor who owns it still gets paid.
Dworkin said that lowers mortgage risks and mortgage rates.
“The mortgage that you get is going to have a lower interest rate than it would have otherwise, probably about half a percent,” said Dworkin.
Last year Fannie and Freddie backed about 40% of all securitized U.S. mortgages. It’s not exactly clear how the administration might go about ending their government-run conservatorship.
Mike Fratantoni at the Mortgage Bankers Association said re-privatization could have an upside.
“We think when they’re out of conservatorship, it’ll help them to be more innovative, more responsive to the markets, but it needs to be done cautiously,” said Fratantoni.
The government selling its stake in Fannie and Freddie could also yield hundreds of billions of dollars for Uncle Sam.
But Andrew Fieldhouse at Texas A&M’s May Business School said we’ve seen this movie before — like, before the government had to bail out Fannie and Freddie when the financial system choked on those mortgage-backed security snacks.
“The pre-2008 status quo in which Fannie and Freddie’s upside gains were privatized, going to shareholders and management and any big downside losses were backstopped by taxpayers, was problematic,” said Fieldhouse.
The Federal Housing Finance Agency, which oversees Fannie and Freddie, declined a request for comment.
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