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

by Ryan Smith20 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.
 

COMMENTS

  • by NoSpin JustFacts | 5/20/2015 7:13:30 AM

    If FF were released from the federal government bureaucracies as required under the 2008 Housing and Economic Recovery Act (HERA) and the treasury department returned the illegally taken profits after FF paid back the full $187.4 billion plus 10% dividends advanced by taxpayers, their capitalization would be well on its way to being restored.

    The government back drop to FF in the housing market has now been proven to be a viable option. Taxpayers have fully recouped their investment in FF after the worse housing market environment in modern history.

    It is time to reform FF so the future Barney Franks can not force FF into making bad mortgages that led to the housing meltdown.

    If you have not already noticed, effective September 1, 2015 FF are already increasing the Loan Level Pricing Adjustments, particularly upon the least risky 740+ credit scores as well as all investment properties and cash-out refinances. It is not privatizing that is causing mortgage rates to begin soaring. This article has been written not based upon facts, rather based upon Zandi's infatuation with moving the U.S. into a European style socialism. Mr. Zandi has been an ardent supporter of President Obama's Big Government.

  • by PMarron | 5/20/2015 7:16:49 AM

    I agree with this. There are mortgages in the gray area with Fannie Mae/Freddie Mac that are being offered by non-QM lenders at substantially higher interest rates. There is no desire to resolve issues, even if mortgages could go into portfolio, be seasoned and then made available to Fannie Mae/Freddie Mac. The extra profit being made on non-QM mortgages appears to distract from working on solutions that can make more mortgages eligible for Fannie Mae/Freddie Mac.

  • by jburns | 5/20/2015 10:26:07 AM

    Higher risk borrowers should have higher rates. Whether it is caused by LTV, credit history, DTI or a combination, it is a risk reward relationship. It incentifiies higher risk borrowers to strive to improve their situation. Higher risk borrowers interest rates are mitigated by mortgage insurance, always have been, that is the purpose of mortgage insurance, that is not even mentioned in the article. Niether is the FHA option that is also designed for the higher risk borrower. People who are not familiar with mortgage lending should not be making rules that affect it period. They have no clue how the real world of capitalism works, and should continue to work properly without their uninformed input. The best examples would be Barney Frank, Chris Dodd, Bill Clinton and the people they put in charge to Fannie and Freddie who had no idea what they were doing, which eventually caused the problems we have today. Depending on how the privatization of Fannie and Freddie is structured, the only influences (other than the open market) on interest rates would be the borrowing costs to the private company vs the Federal Government borrowing costs, and the guaranted pass through to the MBS investor, and the resulting rating of the bonds.

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