Imagining a post–Fannie Mae and post–Freddie Mac world

Part 5

The mortgage market without the government-sponsored entities

A future without the government-sponsored entities (GSEs)

Fannie Mae and Freddie Mac are probably not going to exist in the future. Both Democrats and Republicans recognize the need to reduce the government’s footprint in the U.S. residential real estate market. The consensus in Washington has been that the guarantee fee the GSEs charge has been too low, and the goal is to price government mortgage insurance at the same rate as private mortgage insurance.

MR-homeownership rateEnlarge Graph

The government envisions the creation of the Federal Mortgage Insurance Commission (FMIC), which would act as a re-insurer of mortgage-backed securities. Private mortgage insurance would take the first 10% of losses, and the FMIC would cover the rest.

The government does want to retain a role in encouraging homeownership and helping first-time homebuyers and lower-income people afford to buy a house. In a completely private label market, the minimum downpayment required to allow securitization at reasonable prices would be 20%. The government has (so far) not envisioned doing away with Ginnie Mae, which means that FHA, VA, and 203k home loans would still be available.

Much of this hinges on who will replace Ed DeMarco at the head of the FHFA (Federal Housing Finance Agency). Ed DeMarco is leaving the FHFA and has been criticized for not allowing principal modifications on mortgages held by Fannie Mae and Freddie Mac. Mel Watt has been nominated to replace DeMarco. While he hasn’t officially taken a stance on principal forgiveness, he has voiced support for it in the past.

Given the partisan divide in Washington, a change in U.S. real estate finance could be way off. The Administration is undoubtedly happy with the status quo, where Fannie’s earnings provide revenue to the government that can be put to use for other priorities. Second, given the partisan acrimony in Washington, opening up the Fannie Mae can of worms may have to wait for another day. Still, most observers agree that Fannie and Freddie will disappear at some point.

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