Possibility of privatizing
Steven Mnuchin, nominee for Secretary of the Treasury, telegraphed a possible position for the upcoming Trump administration, saying Fannie Mae and Freddie Mac should be shifted from government oversight to private hands.
Mae and Mac are the largest vendors in the United States home mortgage market, guaranteeing nearly 60 percent of U.S. mortgages. They are the largest source of home buying credit for potential homeowners. The lenders were formerly controlled by private firms until the housing market collapse in the United States.
On the to do list
In an effort to prevent the complete collapse of the United States economy, the government stepped in with a $188 billion dollar lending package to stabilize the firms. But the government also took control of them in a conservatorship arrangement as part of the deal.
While the Obama administration attempted to influence Congress to specifically reform the two lenders as well as the mortgage lending industry as a whole, those efforts have not yielded any results to date.
That may swiftly change.
Mnuchin identified a return to privatization for Fannie Mae and Freddie Mac as “right up there on the top-10 list of things we’re going to get done.”
“We’ve got to get Fannie and Freddie out of government ownership,” Mnuchin said to Fox Business Network. “It makes no sense that these are owned by the government and have been controlled by the government for as long as they have.”
Since their near collapse, both are profitable, and have returned more than $240 billion dollars to the federal government.
Home lending market stable
The fact that the two lenders are government-sponsored enterprises, and are again doing well does have positive ramifications for the home lending market. Fannie and Freddie buy mortgages that are made by banks, which frees the banks to make more loans. Fannie and Freddie can then convert those purchased loans into a marketable debt security. These are sought after by investors, both foreign and domestic, because they are leveraged against default by the weight of the United States government.
The most popular mortgage — a pre-payable, fixed interest rate loan for 30 years — is a highly desirable since it provides homeowners a much more affordable rate. Private lenders may well be loath to take on that level of risk for such an extended period without a government guarantee of some form.
Additionally, government backing kept home interest rates historically low.
This allowed access to the home-buying market for many Americans, who would otherwise be priced out if rates were to soar.
Call to dissolve
“I’m encouraged to hear that ending the GSEs’ conservatorship will be a priority for the new administration and that they see the need to reform the system before releasing the GSEs from government control,” said David Stevens, president and chief executive of the Mortgage Bankers Association, speaking to The Washington Post. “We look forward to working with the next administration toward realizing this goal.”
While a new Treasury secretary would have the ability to alter some parts of the current working agreement, the Trump administration would need an act of Congress to do what Mnuchin suggests. Fiscal conservatives in Congress Jeb Hensarling (R-TX), chair of the House Financial Services Committee, and Senator Bob Corker (R-TN) have staked positions even more severe than Mnuchin’s call for privatization.
Hensarling and Corker stated the two lenders should be eliminated to reduce the government’s exposure altogether. Despite the rhetoric, many observers of the market were skeptical that such a thing would come to pass.
Wait and see
“People don’t expect the government to just step away from the GSEs,” said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co in New York, speaking to Reuters. Complete government withdrawal from the two lenders is unlikely because of the profit sharing arrangement that they have with government. As neither have working capital, a spin up would be very intensive, requiring support for each to become completely self-sufficient once again.
As President-elect Trump made no direct statement on the issue, or many on the housing markets in general, there is no clear blueprint for the actions of the incoming administration on this issue. However, with a pro-business approach in the White House now blended with a streak of fiscal conservatism in both houses of Congress, it is clear that a change of some form may be in the future.