Why Reform Efforts for Fannie Mae and Freddie Mac May Remain Elusive

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The battle to get the government out of Fannie Mae and Freddie Mac has been ongoing since before the Great Recession and before these government-sponsored entities (GSEs) were put into conservatorship. While a new effort for reform has been pushed by President Donald Trump, the hard reality is that getting the government’s involvement out of these GSEs in the future is a serious undertaking that just might not actually end up being all that different.

The president has directed the Treasury and Department of Housing and Urban Development (HUD) to create a plan to reduce the risks that taxpayers will be on the hook if there is another mortgage crisis, among other goals. The GSEs of Fannie Mae and Freddie Mac still remain under conservatorship.

The memorandum specifies that it’s time for reform in our housing finance system. The goals are to reduce taxpayer risks ahead, to expand the private sector’s role in the housing lending markets, to modernize government housing programs, and to make sustainable homeownership for American families a benchmark of success.

All these sound logical enough, right up until it comes to making “sustainable homeownership for American families a benchmark of success.” The mortgage and housing markets have been fluid and stable for most of the past 30 or so years under these programs, and creating major changes could disrupt the housing market all over again.

As far as how to view the efforts to reform and treat Fannie Mae and Freddie Mac ahead, perhaps this latest effort is simply to form a plan that might be implemented in the future. 24/7 Wall St. has looked through multiple reports on this latest action, and the words that keep coming to mind are: vague, cautious and lengthy.

One issue that is always present, but that never really comes up in arguments over the GSEs, is that the private sector tends to seize up and stop transacting business when times get tough. Having the implied government guarantee, again “implied,” allows the mortgage market to continue during periods of economic uncertainty. According to the Federal Reserve’s March 2019 estimates, the total mortgage debt outstanding is more than $15.4 trillion, versus an economy that is now better than $20 trillion in annual gross domestic product.

Having GSEs with a structure on what sort of mortgages (conforming loans) they will allow to be underwritten and then repackaged in pools of mortgages also keeps the rest of the mortgage market more honest. Having trillions of dollars in mortgage securities out in the system without any government support, or even less implied support, is not an easy undertaking.

Any efforts to reform and modernize Fannie Mae and Freddie Mac likely will take quite some time to come to fruition. Nothing happens quickly in Washington, D.C., and that is particularly true of regulating or deregulating industries as dear to the economy as the mortgage sector. We are also in a political climate in which both sides of the aisle fight over the issues they say that they are in agreement upon. There is also a serious issue that many of the politicians who will be opining or approving such a change might not even fully understand how the GSEs’ role actually works in the mortgage market.

Another issue that is certain to get in the way is that the healthy housing market of recent years has gone into a less than robust state in recent months. Many of the economic reports around the housing market have been coming in weak. If the housing market tanks, it’s almost impossible to have a great economy in which average people feel secure. The St. Louis Federal Reserve showed in February of 2019 that housing wealth has more than doubled since 2009, but it also noted that the value of home mortgages owed by households actually has decreased by 3%. The most recent report from the Census Bureau covering the fourth quarter of 2018 projected that 64.8% of adults owned their home.

It also would seem to be more than a safe bet to assume that the election in 2020 might get in the way of creating serious changes in the mortgage market. Any further disruption in the already fragile housing market would not be desirable after all of the economic expansion efforts that have been made to date.

If the government’s conservatorship of Fannie Mae and Freddie Mac is to come to an end, and if the government truly can increase competition, this likely would be considered a major victory on the surface. Still, most politicians understand that the economy is not considered strong if the housing market freezes up.

Having Fannie Mae and Freddie Mac keeps at least some structure and rules-based lending standards. While the banks are highly regulated on how they can go after and package mortgages, the rise of new fintech and new crowd-sourced lending entities could effectively do whatever they want in the private market without regulators ever being involved or knowing about it.

These are only some of the issues that may get in the way of how Freddie Mac and Fannie Mae are treated under any changes ahead. In the end, there may be more of a societal benefit that outweighs the taxpayer risks for Fannie and Freddie to remain under their current classification as GSEs.

Shares of Fannie Mae (FNMA) were last seen up almost 2% at $2.96, but they had traded as high as $3.08 earlier in the day.

Freddie Mac (FMC) shares were up 2% at $2.78. They traded as high as $2.92 earlier in the day.

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