How Fannie Mae and Freddie Mac Benefit from a Republican Congress in 2017

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CA Realtor

CA Realtor

Since Donald Trump won the presidential election, there has been a lot of speculation about what effect his administration and Congress may have on Freddie Mac and Fannie Mae. As of Dec. 1, 2016, we are starting to get some idea about what a Trump administration has in mind.

Today, Trump’s nominee for US Treasury Secretary, Steve Mnuchin, said that Freddie Mac and Fannie Mae, the biggest players in the home loan market in the US, should be returned to private control.

Roles of Government Sponsored Enterprises

Fannie and Freddie are two of the biggest controversies to emerge from the 2008 financial crisis. When the US housing market started to tank in 2007, the finances of both government agencies were crippled. It forced a taxpayer bailout of $188 billion to help to prevent the US financial system from completely breaking down.

Since 2008, the Obama administration and Congressional Democrats have generally argued that Congress should pass new legislation to reform the US housing finance system. But several efforts to reform Freddie and Fannie have failed, despite a desire by many in Washington for them to be held in private hands.

However, this week, Mnuchin said that getting Fannie and Freddie out of government hands is a top 10 goal of the new administration. He noted that it is very critical to get Freddie and Fannie out of government hands. These statements immediately sent shares of Freddie Mac and Fannie Mae to their highest prices since 2014. Mnuchin argues, as do many Republicans, that the two agencies should not be owned by the government.

Since the 2008 crash, both lenders have been under the conservator-ship of the Treasury Department, but both are now turning a profit again. They have now returned in excess of $240 billion to federal coffers. The two government sponsored enterprises, also known as GSEs, aid the US housing mortgage market by buying up loans that banks make. This frees up space on the balance sheets of many lenders so they can make more loans.

The GSEs bundle the loans into debt securities, which are prized by investors around the world; they are essentially guaranteed from default by the federal government of the United States. A consequence of this is that American mortgage rates are kept low, and it allows borrows to finance their homes for long term – up to 30 years. This is a very unique aspect of the US mortgage market that makes it easier for more Americans to buy a home.

If there was a major change to the guarantee relationship provided by the US government, this could make it much more expensive to buy a home. It also could even lead to the elimination of 30 year mortgages. Government backing does allow Fannie and Freddie to tap into the worldwide debt market at a rate that is much lower than for private borrowers.

The US government is seen as crowding out many private lenders in the mortgage market, and increasing the risk of the federal government of being on the hook for mass defaults.

Mnuchin has stated publicly that he wants to eliminate US government control of Fannie and Freddie, but there have been no details released yet. The Trump administration could change how Fannie and Freddie work somewhat, but a wholesale reform of both agencies require an act of Congress.

Mnuchin stated that when Republicans restructure Fannie and Freddie, they will do it in such a way that they will not be taken over ever again. If there is a major effort to reform the GSEs, the fight will pit housing market advocates against Republicans in Congress who are fiscally conservative.

Real Estate Markets

According to the National Association of Realtors, no secondary mortgage market would cause mortgage interest rates to go higher and would make home loans less affordable for many in the US. However, leading TX Republican Jeb Hensarling, who is Chair of the House Financial Services Committee, has stated that Freddie and Fannie should be put into private hands. Republican Senator Bob Corker also supports putting Fannie and Freddie in private hands to reduce the risk to the federal government.

Many financial experts don’t think that the US government will fully separate from Fannie and Freddie any time soon. The US government has controlled the GSEs since 2008, and the US Treasury give it the right to have nearly 80% ownership, but it has yet to exercise this right. So, Fannie and Freddie are publicly traded at present and are backed by very prominent investors who want them to be returned to private control.

Mnuchin also argued that the government ownership of the GSEs is cutting private lenders out of the market. He also noted that the Obama administration should have returned them to private holding status, but this apparently was not a priority for Democrats. Releasing the GSEs back into private hands would be a major change in direction from how Obama treated Fannie and Freddie.

Reflection

There is no doubt that a Trump administration and a Congress in full control by Republicans is going to mean major changes for Fannie and Freddie. It remains to be seen how major the changes will be. It seems likely to us that the federal government will keep some amount of control of the GSEs so that the feds can step in if there is another financial calamity. We will see what happens in early 2017.

About Dusty Brazil

CA BRE #01780273- Dusty Brazil is a top ranked Realtor with Pacific Sotheby's International Realty. Mr. Brazil has been selling real estate in San Diego for over 10 years and lived in this coastal community his entire life. Dusty is an accomplished surfer who enjoys writing home buying articles when he is not catching waves.