Fannie Mae and Freddie Mac shares jumped this week after new comments from Trump administration officials and a board shake-up at the companies drew fresh attention to their potential release from government control.
But beyond the stock market, housing experts see plenty of reasons to be skeptical about the end of an arrangement that dates back to the depths of the financial crisis. The biggest one? Privatization will probably send mortgage rates higher.
“We can debate how much of a cost it will be,” said Mark Zandi, chief economist at Moody’s Analytics. “That’s a legitimate debate, but rates are going to go higher.”
The Trump administration is considering sweeping changes to a crucial piece of the US housing ecosystem at a time when affordability is near an all-time low and home sales are mired in a years-long slump. While Fannie Mae and Freddie Mac don’t make mortgages, they play a crucial role in lending by buying up mortgages from banks and other lenders and packaging them into bonds. The system frees up money for more loans.
Investors’ willingness to buy the bonds — mortgage bonds are a more than $10 trillion market — helps keep Fannie and Freddie’s borrowing costs, and by association, 30-year mortgage rates, low.
Today, mortgage bonds are seen as a good bet by investors in part because Fannie and Freddie have the government’s backing and share its top credit ratings. A major hurdle to privatization is how to preserve at least some of that backing. If investors perceive a private Fannie and Freddie as riskier, the companies will have to pay more to borrow, which would likely mean mortgage borrowers will pay more too.
Read more: What determines mortgage rates? It’s complicated.
Treasury Secretary Scott Bessent has said that plans to release the two companies will hinge on mortgage rates. At around 6.7%, rates today are more than 1.5 percentage points higher than they were at any point during Trump’s first term, and they’re at similar levels to where they were before Fannie and Freddie entered conservatorship in 2008.
The power of a guarantee
The companies, known as government-sponsored enterprises (GSEs), were chartered by the federal government but spent decades as private companies. In fall 2008, they were on the brink of failure when risky mortgages they bought up began going bad en masse. The Bush administration, fearing a complete collapse of the mortgage financing market, placed the two companies under its supervision and spent billions to bail them out.
That takeover is an example of Fannie and Freddie’s “implicit guarantee” — the idea that the government wouldn’t let such an important financial institution fail, even if it were private and no formal agreement about government support was in place.
When the two companies entered conservatorship, that implicit guarantee became effectively explicit.
The conservatorship arrangement was intended to be temporary. The idea of releasing the companies from government oversight has some bipartisan support, but it never became a reality across multiple presidential administrations because of concerns about mortgage market disruptions.
In the years since the financial crisis, Fannie and Freddie returned to profitability, paid back the government, and developed new methods to shift credit risk away from taxpayers. Meanwhile, the housing market recovered, and homeowner equity sits near record highs.
“Right now, everything seems to be working just fine,” said Eric Chan, a vice president in North American Financial Institution Ratings at DBRS Morningstar, a credit grader. Because Fannie and Freddie back more than half the mortgages in the country, even relatively small changes to their operations could have an outsized effect on the market, he added.
Read more: 6 steps to choosing the right mortgage lender
Most experts agree that Fannie and Freddie would need some sort of government guarantee when they go private to continue without disruption. Even a return to an implicit guarantee would likely raise mortgage rates, said Jim Parrott, a nonresident fellow at the Urban Institute and a former White House economic adviser during the Obama administration.
“The squirrely part about an implicit guarantee is that it’s a perception-based phenomenon,” Parrott said. If any major market players, like top mortgage bond investors or ratings agencies, begin to question the government’s commitment, it would create a “ripple effect that will flow through the market whether they’re right or not,” he added.
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Zandi, of Moody’s, estimates that if Fannie and Freddie go private with an implicit guarantee, mortgage rates could rise between 20 and 40 basis points. From current levels, that would mean rates back at or near 7%.
A release with no guarantee whatsoever could send rates 1 to 1.5 percentage points higher. Few experts view that scenario as probable given the destabilizing effects on the housing market.
“Without a government guarantee, the GSEs have nothing,” Mario Ichaso, a mortgage-backed securities trading desk strategist at Wells Fargo, wrote in a note to clients on Monday. “And America would lose one of its primary engines that has generated trillions of wealth for its citizens through homeownership.”
There’s one scenario that could result in lower rates: The government could formally back the companies before they’re released, giving them an even more explicit level of support than the current system. But that backstop would require an act of Congress, which is politically unlikely.
Any release plan will take time to develop given the complexities and the money involved, said Mike Fratantoni, chief economist of the Mortgage Bankers Association, which has advocated for a conservatorship exit involving an explicit guarantee.
“This is such a big issue,” Fratantoni said. “The numbers are so big … that this is going to take a lot of attention from the Treasury and particularly from the Treasury secretary.”
Claire Boston is a Senior Reporter for Yahoo Finance covering housing, mortgages, and home insurance.
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