Rates Will Skyrocket When Fannie & Freddie Are Privatized

Fannie Mae and Freddie Mac had to be bailed by the U.S. government with a $200 billion cash infusion after the 2008 mortgage meltdown.

As a result, the U.S. government justifiably put them into “conservatorship” – which means they are effectively controlled by the government.

There is much talk now about pulling Fannie and Freddie out of conservatorship and effectively privatizing them again – and this is something I personally very much support even if it results in rates going up (because I think it will be temporary).

This is a big deal because Fannie and Freddie support about 70% of the mortgage market now.

Banking analyst, Chris Whalen, was just on a HousingWire podcast discussing this: Chris Whalen on removing Fannie and Freddie from conservatorship under Trump.

Mr. Whalen made many points, including:

1. It will take several years to privatize Fannie and Freddie, given the size, breadth, and complexity of the organizations.
2. Fannie and Freddie will likely see their bond rating fall, requiring higher yields for their mortgage-backed securities (which means higher mortgage rates).
3. Fannie and Freddie will see a higher cost of funds for their borrowing – which will result in higher rates.
4. Fannie and Freddie will either lose (unlikely) or have to pay more for their government guarantee for their bonds (which means higher rates).
5. Fannie and Freddie are very inefficient now because of their government control and near monopoly status – and privatizing them will force them to become much more efficient very quickly in order to compete with other huge players in the mortgage market like Chase, U.S. Bank, UWM, PennyMac, etc.
6. Commercial banks will play a much larger role in the mortgage market but focus more on larger loans (so borrowers with small loans may suffer).
7. Loan officers, commercial banks, and mortgage lenders will all push back on privatization for a few reasons: (1) banks will want a change in laws to make it easier for them to access the mortgage market; and (2) LOs and lenders like how things are now and don’t want to change what isn’t broken.

I desperately want to see Fannie and Freddie privatized along with changes in current laws and this is why.

1. Lending Will Become Easier For Borrowers: This is the best reason, as lending will become much easier – especially for strong borrowers. I’ve blogged many times about the loan we did for a Major League Baseball player who had 3% debt ratios – and we had to beat him up for an insane level of documentation. In a post-Fannie/Freddie world, that would hopefully no longer be the case.
2. Mortgages Are Seen As Commodities: With Fannie and Freddie dominating so much of the market, all too many borrowers see mortgages as commodities. This makes it more difficult for smart operators to stand out and it makes competition brutal in a slow market.
3. Smart Operators Shined Pre-2008: Prior to 2008, there were extremely bright loan officer teams that did enormous volume by offering a huge variety of loan products at very low rates. They did this by building unique relationships with major lenders that allowed them to offer lower rates; by understanding more loan products and guidelines than less motivated or less educated lenders; and by operating very low overhead operations. Large banks could not begin to compete with these guys, as they were very worried about them, and that is partly why they pushed for the very stringent regulatory environment we see now. Fewer than 10% of the loans I closed prior to 2008 were Fannie and Freddie loans.
4. I Welcome The Change Other LOs and Lenders Fear: We have a highly educated, nimble, and tech-savvy team at JVM – and we could rebuild our entire system (CRM, origination platform, marketing programs, tech stack, underwriting approach, etc.) in a few weeks if necessary. We’re not alone, of course, too, as there are many sharp operators in the market. So, I’d hate to see resistance to beneficial change simply because some players are unable to change.

So yes, rates could rise by 1/2% if Fannie and Freddie are privatized, but I think the increased competition and efficiencies – along with new loan products coming to market – will bring rates back down.

NOTE: I realize we needed changes and tighter regulations after the 2008 mortgage meltdown.

But – I still contend that we would never have seen a meltdown but for the government –

1. allowing bond rating agencies to give subprime mortgage-backed securities AAA ratings;
2. encouraging and allowing Fannie Mae to buy up huge swaths of subprime loans – creating an artificial market for them; and
3. encouraging ridiculous lending practices in general via “affordable housing” initiatives.