Mortgage News and Notes

The Future of Fannie and Freddie

May 31st, 2019 1:14 PM by Steven Hofberg

For mortgage origination firms like Residential Mortgage Center, it is necessary to focus primarily on the short term.  In other words, we constantly monitor current interest rates, terms, and conditions, all of which have the most direct effect on our clients as they seek mortgage financing.  Rates have fluctuated lately, but in a relatively narrow range. So despite the volatility of several market affecting factors, such as geopolitical instability, trade wars, fluctuating oil prices, and of course, the domestic political dystopia we find ourselves in, rates remain at historically low levels.

 

I would argue that much of the credit should go to the stabilizing influence of Fannie Mae and Freddie Mac, the two government sponsored/owned mortgage giants.  Yes they suffered greatly (some suffering was indeed self-inflicted) during the financial crises of ten years back, and needed a bailout from the taxpayers, but since then they have deposited billions of dollars a year directly into the US Treasury.

Steven Hofberg, Operations Manager

 

For those not familiar with how Fannie and Freddie operate, you should know that they do not make mortgage loans, but instead buy loans from lenders and package them as bonds which are then sold to institutional investors.  Most economists believe that like most other developed countries, the US would not have a 30-year fixed mortgage product without their unique ability to match banks with investors such as pension funds looking for steady long term yields.  So with that introduction, I would like to focus on a long term issue, the future of Fannie and Freddie (F&F).

 

Senior administration officials are now discussing how to overhaul our mortgage finance system with “a great sense of urgency.”  And Treasury Secretary Mnuchin recently said he wants a plan developed in the next 6 months (Wall Street Journal April 15 2019), which may be overly ambitious.  There is a range of opinions on how to accomplish a reform, from merely making changes to F&F, all the way up to eliminating them completely.  In the middle is a plan to keep F&F, but reduce their footprint by creating incentives for private institutions to take on a larger role in the mortgage market.

 

It is my belief that greater participation by private institutions would be good for all stakeholders, especially borrowers, by the creation of new products as well as the positive effects of greater competition.  But the reformers have to be careful.  If F&F are eliminated, or gutted so severely that they exist in name only, we risk turning the mortgage market over to the likes of JP Morgan Chase, Citigroup, Bank of America, and other financial giants.  Needless to say, they are unlikely to support the public interest as much and as successfully as F&F have over many decades.

Steven Hofberg, Operations Manager

Posted by Steven Hofberg on May 31st, 2019 1:14 PM

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