Fannie Mae and Freddie Mac have long been a foundation in the American home purchase industry and otherwise make an otherwise volatile market in one that is stable and predictable to buy houses, and investors who buy housing loans as mortgage -related securities.
But last week William Pult, President Trump's appointment consultant for the Federal Housing Finance Agency, shook the basics of the two mortgage companies when he replaced 14 of their 25 sitting board members and committed himself as chairman of both bodies. Mr. Pulte also removed managers from both companies and at FHFA, which Fannie Mae and Freddie regulated Mac. On Tuesday, he signed an order to end fannie and Freddie programs that should provide support for some first-time buyers of their own homes in payments and closing costs.
The changes come when the Trump administration officers increase the discussions about the privatization of the mortgage giants who have been in the Federal Conservatory since the enforcement crisis in 2008.
While home buyers do not interact directly with Fannie Mae or Freddie Mac, their mortgages are likely to be supported by one of them. Together, companies that withdraw single-family houses loans up to $ 806,500 supports around 70 percent of the US mortgage market. Privatization could be a wind case for investors, but would probably make more expensive in the middle of an affordability crisis.
“It would mean that the mortgage interests would definitely increase”
What are Fannie Mae and Freddie Mac?
The Federal National Mortgage Association or Fannie Mae was founded during the Great Depression when almost a quarter of the Americans lost their houses by enforcement. The congress founded by the Congress as part of the New Deal should offer stability, liquidity and affordability to a crumbling housing market. The Federal Home Loan Mortgage Corporation or Freddie Mac was founded in 1970 by the Congress to expand the secondary market for mortgages at home. They are known as state -funded companies or GSES.
After a lender has given a loan to a loan, it has the opportunity to sell this loan on the secondary mortgage market, which is dominated by Fannie Mae and Freddie Mac. The income gives the lender more money to spend more loans.
After buying the loan, the GSE can bundle it with other loans in mortgage securities and then sell these securities to investors, including pension funds, commercial banks, state and local governments as well as investment fund managers.
This system of selling mortgages on the secondary market gives the credit industry enormous liquidity and promotes a stable, reliable market. For example, Fannie Mae created the 30-year-old festival mortgage with a permanent rate. In other countries, mortgages have a variable interest rate, with interest rates rise and drop from year to year. “The presence of this secondary market makes this 30-year-old permanent mortgage available,” said Greg McBride, boss Financial Analyst from Bankrate.com.
It was always implicit that the Federal Government supported Fannie Mae and Freddie Mac and made it attractive to investors. In 2008, when the real estate market collapsed, the two GSEs were on bankruptcy after they bought too many toxic subprime loans. The government saved them and brought them to a conservator that continues to this day.
A drum beat for privatization
At the end of President Trump's first term, his administration began privatizing the two mortgage companies. This would be music for the ears of investors who bought stocks in the GSEs after the 2008 crisis when it was cheap.
In order to privatize, there would be a first public offer, and investors would buy shares from the companies, relocate them from the government's books and provide a cash infusion for an administration that has made the cost reduction a priority. WEALTHY investors and hedge fund managers, who have shares at reduced prices, must earn billions from an IPO. One of the biggest supporters is the billionaire, William B. Ackman.
Trump officers have recently taken up the idea. In January, Mr. Ackman presented a detailed privatization plan for X in February. Scott Turner, Secretary of the Ministry for Housing and Urban Development, said that the privatization of the companies is a priority.
The interest rates could increase. Collective agreements could disappear.
While privatization for wealthy investors would be a commitment, it would increase interest rates for buyers of homes, said Ms. Goodman. How much would depend on how the companies are privatized?
Why should interest rates rise? As part of the current system, the mortgage securities bought by the Federal Government are guaranteed by the federal government, which means that investors are shielded from losses if too many borrower puts their mortgages in arrears. In a privatized market without these guarantees, the securities could become more risky investments, which means that interest rates increase. The lenders could also fulfill stricter loan requirements, which makes it more difficult for some buyers to qualify for a loan.
Collective agreements could be another victim of a more volatile market, said Ms. Goodman. Borrowers rely on interest rates that usually last 30 to 60 days. These agreements give buyers to their own buyers that the interest rate that their lender experienced remains determined while they undergo the slow process of completing a home purchase. A buyer can include this interest rate because his lender knows that he can easily sell the loan as soon as the sale closes. However, if these conditions change in a privatized market, lenders can hesitate to block the tariffs or to calculate much more for the option. For borrowers, this would mean more uncertainty at the final table, which may bring business onto the market.
“Everyone talks about privatization how they turn the switch around,” said Ms. Goodman. “In reality there are countless questions that you can answer before you take this IPO.”
What does this mean for existing homeowners?
For homeowners, the privatization of Fannie and Freddie would have no influence on an existing mortgage, since the conditions that they agreed when they signed their loans would not change. Fannie and Freddie also buy refinanced loans, so a homeowner who wants to refinance may also have to handle the new market.