Privatizing Fannie & Freddie could send mortgage rates soaring -- report

by Ryan Smith19 May 2015
Many frustrated shareholders in Fannie Mae and Freddie Mac want the mortgage finance giants released from federal control, so they can reap the profits of their investments. But that might not be so great for the mortgage industry, according to a new study.

A report by Jim Parrott, senior fellow at the Urban Institute, and Mark Zandi, Moody’s Analystics chief economist, found that privatizing Fannie and Freddie could cause mortgage rates to spike by almost a full percentage point.

If the GSEs were privatized, the report states, they’d most likely have to increase their capitalization – which in turn would lead to higher costs that would be passed on to borrowers. Mortgage rates could jump by up to 97 basis points – in addition to other costs, ultimately borne by borrowers – that would come with privatization. Higher-risk borrowers would see their rates jump even more.

“(Fannie and Freddie) would need to hold more capital against riskier loans than others, forcing them to either increase mortgage rates more for those borrowers or lend less to them,” Parrott and Zandi wrote. “Either way, the range of averages understates the ultimate impact on pricing for many of the low-income borrowers most affected by price increases.”

Fannie and Freddie were placed into government conservatorship in 2008 after teetering on the brink of collapse. Under the terms of the conservatorship, the GSEs send all their quarterly profits to the Treasury. The company’s recent record profits have been a windfall for the Treasury – but that’s angered shareholders who’ve been unable to realize their own profits.


  • by | 5/19/2015 4:50:22 PM

    I really don't get the Urban Institute's stance here. The say it would be more expensive to release F&F than to keep them in conservatorship. Okay, well what do they propose be done then? Johnson-Crapo isn't going to happen. The PATH act isn't going to happen. Everyone agrees that they shouldn't be in perpetual conservatorship. Release seems to be the only viable option on the table here.

    As for the math in the piece, they start from a flawed premise right from the start. F&F absolutely do not need 10% capital to operate in a safe manner. Even the overzealous stress test that was widely discussed recently demonstrated that under extreme conditions, the companies needed just 5% capital. There's $50 billion in excess reserves on the balance sheet, and based on the payments from the net worth sweep (according to Bloomberg), the senior preferred is down from $117 billion to only $25 billion. Recap would be cheaper, faster, and much more plausible than they make it seem.

    If you look through his other pieces, Parrot seems to have an ideological bias against the GSEs. As Jim Millstein said, he just keeps trying to figure out ways to say "no", instead of solutions to move forward.

  • by Confused | 5/19/2015 5:07:36 PM

    So the government should buy out the shareholders?

  • by Einstein | 5/19/2015 5:07:57 PM

    First of all the opposite of privatize is nationalize: were Fannie and Freddie ever nationalized??? Starting from this very title, it is clear that the author either has no clue as to the facts and just simply repeats the BS he has been brainwashed with, or is intentionally distorting the facts to further a personal or quasi-personal agenda (his employer's). How much are you getting paid to write such nonsense? Why should mortgage rates soar if F & F are released, when what held them low is precisely F & F.


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