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The Potential Effects of Privatizing Fannie and Freddie

The Trump Administration recently released a proposal suggesting massive changes to certain areas of the Federal government. While many news stories focused on the recommended privatization of the U.S. Post Office and the combination of the existing Department of Education with the Department of Labor, by far the most meaningful change for the mortgage market is the recommended privatization of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

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The privatization of Fannie and Freddie would need congressional approval to actually become a fact, of course. But if it is enacted, the results are likely to be highly significant changes to the system of housing finance in the United States.

Taking the Mortgage Market Increasingly Private?

Of course, a far greater percentage of mortgages may end up being guaranteed in the private market rather than the public one eventually.

Currently, according to the report, Fannie, Freddie, and a third Federal entity, the Government National Mortgage Association (Ginnie Mae), with loans guaranteed by the Department of Veterans Affairs (VA), the Federal Housing Administration (FHA), and the Department of Agriculture, constituted roughly 70% of all U.S. mortgages originations as of last year.

At the beginning, the proposal seems to suggest, Fannie and Freddie would be completely privatized under a Federal authority with experience in the secondary mortgage market. But that Federal authority would also be charged with creating a regulatory background that would facilitate competition among private entities and Fannie and Freddie.

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Taking a Closer Look at Privatization

The proposal may increase accountability and transparency, in the service of more clarity about costs and benefits. That at least is the hope of the Trump administration. The proposal notes that “these entities…form a complex and overlapping network of cross-subsidization, without clear accountability as to who is paying for, and who is receiving housing subsidies.”

It goes on to say that these drawbacks may actually impede the stated objectives of the GSEs, which are to facilitate home ownership among middle-income citizens.

Changes, if approved, may eventually mean that government-backed guarantees on mortgages will change from being a dominant mode of purveying mortgages in the U.S. to a failsafe resorted to only in times of financial crisis.

Officials of the Mortgage Bankers Association (MBA), for example, hailed the proposals as being in line with policy measures the MBA and other industry groups have advocated, including more private capital.

Privatization may result in falling home ownership statistics. GSEs have not only guaranteed mortgages, they have usually offered more affordable interest rates than the private market. If privatization results in higher interest rates, fewer prospective homeowners may be able to afford homes.

Officials from the National Community Reinvestment Coalition noted that home ownership is currently the lowest it has been in a half-century and decried the potential for decreased home ownership for middle and lower-income Americans. Officials also noted that homes are a large part of wealth-building, and lack of homeownership not only deprives consumers of homes but of the potential appreciation they may otherwise realize.

The proposal may have political repercussions when Americans next go to the polls. But the direction of any political repercussions depends on what parts of the proposals are eventually enacted — whether average citizens notice benefits and drawbacks to either increased privatization or the loss of GSEs.