Learn > [REN #314] Will Fannie and Freddie Survive a Trump Administration?
Most of us know Fannie Mae and Freddie Mac as government-sponsored mortgage giants that have largely taken over the mortgage market since the housing crisis. Did you know, however, that they were originally formed by president Franklin Delano Roosevelt as part of his New Deal intended to provide local banks with federal money for mortgages?
While it seems unlikely that the “government-sponsored enterprises” (GSEs) as they are known today, will ever return to quite such a minor position in the housing market, it does appear that our current administration is about to attempt some sort of change to their current role. Investors should watch closely, because anything that affects mortgage availability and affordable housing affects us all.
In 2008, the federal government “rescued” both Fannie and Freddie from the fallout from a lot of really unstable mortgage loans that they had insured and/or purchased during the housing boom. Interestingly, in 2000 the Department of Housing and Urban Development (HUD) actually put a number of anti-predatory lending rules in place that prevented risky loans, like subprime loans, from being counted toward the GSEs’ affordable housing goals. In 2004, when those rules were dropped, things got crazy quickly as you likely recall.
Fannie Mae and Freddie Mac were supposed to underwrite these risky loans responsibly, thereby, as then president and CEO of Fannie Mae Daniel Mudd explained it in 2007, preventing private mortgage industry players from marketing those risky products without regard to borrowers’ financial security. As you probably remember, it didn’t really work out that way.
By the time the housing bust hit, the GSEs were billions and billions of dollars in the hole. The federal government bailed both agencies out with taxpayer money, that has now been repaid, designated them government-sponsored entities, and left them still publicly traded and investor-owned. However, GSEs have also been used by the federal government to shore up the housing market since the crash.
Not surprisingly, many of the conservatives who elected the sitting president would like to see the government’s control of Fannie and Freddie lessened if not removed completely. Many on both sides of the aisle agree that the GSEs need to take a completely different role in housing than they currently hold, or even be dissolved entirely.
Right now, because Fannie and Freddie are government-owned, they are a risk to the government in the event that their operations go south again because they can draw on the Treasury. Treasury secretary Steve Mnuchin has been very blunt about the issue, telling “Fox News” late last year, “We’ve got to get Fannie and Freddie out of government ownership. It makes no sense.”
In March of this year, Reuters reported that the Senate Banking Committee had begun having “weekly bipartisan staff meetings on Freddie and Fannie reforms,” but predicted that not much would happen quickly. It’s possible that the predicted $10 billion dividend payment from Q4 2016 might have had something to do with the slow pace on that front.
However, President trump and his administration have been adamant that GSE reform is coming soon. Now, it appears that they are at least going to take a shot at it.
According to Bloomberg Politics, Tennessee republican senator Bob Corker and Virginia democrat Mark Warner are presently considering breaking up Fannie and Freddie completely. The two have considered splitting the single-family business side of the GSEs off from the multifamily side, which many people do not even realize exists. Corker told the Mortgage Bankers Association in late June that he and Warner believe that although there is a need for “competition” in the single-family mortgage business, that “may not be as necessary in [GSE] multifamily business.”
At present, there is no real clue about what might be done as far as the single-family sector goes other than that both parties agree there is a need for reform and a need for (there’s that word again) competition. In the meantime, the Federal Housing Finance Agency (FHFA) is proposing new housing goals for Fannie and Freddie that would last through 2020. Those rules include purchasing slightly more mortgages and refinance loans at low-income levels than the GSEs do currently on both single- and multi-family levels.
What will a Fannie/Freddie reform mean for investors? Well, it depends on how deep the reform actually goes. If ultimately “reform” becomes a fairly meaningless word that just goes toward revising existing goals for the entities, then probably not much will change. Over time, we could even end up in another housing crisis if the country’s mortgage market becomes over-dependent on Fannie and Freddie, which many would argue it already is. If that happens, the cycle will likely continue and investors will continue to do what investors do best: buy and sell based on the cycles.
If reform is taken more literally and Fannie and Freddie are actually removed from their current position as “government sponsorships,” the free market will likely take effect and, in the short term, it could mean lower mortgage availability since left to their own devices, Fannie and Freddie would likely buy fewer mortgages. Presently the entities must buy a certain number of riskier loans as part of their role in shoring up the housing market. Fewer conventional mortgages opens up a space in the market for creative financing, a larger renting population, and more private mortgage notes – all good places for real estate investors.
In the unlikely event that those with extreme views on Fannie and Freddie get their way and the GSEs are eliminated completely – and it seems pretty unlikely that this would happen in the short term, if at all – then John Lignon and William Beach, authors of a Heritage Foundation report on the subject – predict that interest rates will rise, the labor market would stabilize, and the long-term effect on the U.S. economy would be negligible, less than 0.037 percent. They also predict that after the first few years of the GSEs’ elimination during which consumer spending might decline slightly, “real disposable incomes would increase on average $11 billion (0.08 percent) per year over the next 10 years and homeownership would decline by 0.112 percent over the same 10 years.
As with any type of major change in our government, the odds are against it being, well, major or abrupt. Investors simply need to monitor this situation and be ready to be creative and adapt to this market change just as they would any other.