From Jason Payne, Market News Analyst …
Wow.
There now appears to be a chance that we’ll all be waving “goodbye” to Fannie Mae and Freddie Mac in approximately five years.
Specifically, leaders of the Senate Banking Committee introduced a plan last weekend to replace the two financiers with a government-backed mortgage-bond insurer.
And although much debate and political wrangling will surely ensure during the upcoming months and years, it is notable that this Senate proposal is already supported by the White House.
In 2008, the federal bailout of these government-sponsored entities was partially credited with averting a collapse of the financial system, and a majority of folks in Washington and on Wall Street were quite relieved when Fannie and Freddie were able to survive on economic life support.
But now, less than six years later, we may be seeing the beginning of the end for these mortgage giants.
And it may deliver an unintended blow (or two) to our industry’s housing recovery …
A Brief History Lesson
Fannie Mae was established in 1938, near the end of the Great Depression, to boost homeownership by making mortgages more available for low- and moderate-income borrowers. Along with the smaller Freddie Mac, created in 1970, the company bundles loans into mortgage-backed securities that are sold to investors with the support of the government.
Federal officials steadily increased the firms’ mortgage origination goals during the Bill Clinton and George W. Bush administrations. By 2008, the government’s mandate to reach low-and moderate-income families peaked, an aim made possible by lenders peddling riskier loans.
During the housing crash, the surge in defaults almost sunk the companies and regulators seized them in 2008. The two firms received $187.5 billion in taxpayer funds over the next three years. And the Federal Housing Finance Agency lowered the firms’ mortgage origination goals. It took about three years for Fannie Mae and Freddie Mac to earn profits again.
As of March 2014, the companies have returned almost $202.9 billion to the U.S. Treasury -- exceeding the size of their combined bailouts. And the funds are counted as dividends on the federal investment, not as a repayment of the aid, which leaves Fannie Mae and Freddie Mac no avenue for exiting U.S. control.
Accordingly, President Obama and a bipartisan group of lawmakers want to wind down the two companies, shrink the government’s influence in the market and bring in more private capital to create a less risky housing finance system.
Moving Forward, Despite Threats to Mortgage Rates & Homeowership
A draft of the recent Senate proposal, released Sunday by Senators Tim Johnson (R-SD) and Mike Crapo (R-ID), would require private investors to bear losses on the first 10% percent of new mortgage-bond insurer’s capital. And according to our friends at Credit Suisse AG, this requirement would likely lead to higher mortgage rates.
Rates for 30-year fixed loans climbed to 4.37% last week from a near-record low of 3.35% in early May. The rate reached a two-year peak of 4.58% in August.
Additionally, the Senate plan would also eliminate a longstanding mandate that a percentage of mortgages go to lower- and middle-income families. According to our friends at Bloomberg, this mandate could reasonably be expected to decrease America’s overall homeownership rate.
However, despite any threats to rising mortgage rates and/or America’s overall homeownership rate, Senators Johnson and Crapo are hoping to pass the measure this year.
Crapo told Bloomberg Television last week that it’s important to avoid the toxic mortgages that pushed the country into financial crisis.
“There probably will be a little bit of additional cost in some senses, but there will be actually savings and efficiencies in other contexts,” Crapo said. “What we’re putting together is at the front end of everything a strong underwriting system so there will have to be buyers with the ability to repay.”
The draft legislation calls for the dismantling of Fannie Mae and Freddie Mac over five years, which could be extended to prevent market disruptions, such as spikes in borrowing costs, according to a statement yesterday.
A Lack of Political Support?
However, we note that this battle has only just begun, and there are sure to be many additional twists and turns yet to come in the ongoing saga of Fannie Mae and Freddie Mac.
The Senate plan, which was drafted with input from the Obama administration, has yet to gain the backing of Senate Democratic leaders, who will determine whether it gets a vote. Senators Johnson and Crapo plan to hold a committee vote in coming weeks, and are pushing to pass their proposal this year before mid-term elections in November.
And although White House spokesman Bobby Whithorne says the administration supports the Senate proposal, congressional leaders such as Senator Elizabeth Warren (D-MA) have said they won’t back a plan to replace the mortgage giants unless it guarantees affordable loans for most homebuyers and includes significant support for low-income rental housing.
Additionally, we note that the Johnson-Crapo bill may struggle to gain the support it needs to advance in the next four months, before lawmakers’ attention shifts to midterm elections. A Democratic Senate aide said last week that the leadership is currently unenthusiastic about legislation that would eliminate the companies.
In the House, a bill that would almost entirely privatize the mortgage market, written by Financial Services Committee Chairman Jeb Hensarling of Texas, hasn’t gained enough support for a vote of the full chamber. It is unclear whether the House would act this year even if the Senate passes a bill.
The next installment of Jason Payne’s analytical Market News Update series is currently scheduled for Wednesday, April 2nd.
Jason Payne
is a management consultant and founder of the Groundwar Group -- a private consulting firm providing premier corporate advisory and leadership training solutions for business leaders and investors worldwide. Mr. Payne is also the Senior Market News Analyst and a featured "Mindset" advisor for more than 15,000 entrepreneurs and investors at RealEstateMogul.com -- roles he has held since 2013 and 2014, respectively. In these capacities, Jason draws from more than a decade of successful business and investment research on Wall Street to provide insightful commentaries on a wide variety of investing- and leadership-related topics.
Mr. Payne began his career as a research analyst in the award-winning Equity Research department of Morgan Keegan & Company, where at 26 years of age, he became one of the youngest published analysts on Wall Street -- with a specialized focus on real estate investment trusts (REITs). Jason also holds a degree in Finance from New York University's prestigious Leonard N. Stern School of Business, and he is currently completing his professional residency within the Global Leadership Training program of Uruguay's multinational Geronimo Center for Innovation & Leadership.