INTEREST RATES COULD SHOOT UP AT ANYTIME
We often remind both borrowers and agents that interest rates are generally expected to remain low for some time, but that does not mean they cannot shoot up unexpectedly.
Our point is that both buyers and current mortgage holders should take advantage of today’s low rates now before the unexpected does happen.
What could push rates up? Unexpected inflation news; resolution of the trade war with China (would send rates way up); unexpected positive economic news; and possibly the privatization of Fannie Mae and Freddie Mac (the observation of an industry observer today).
WHAT ARE FANNIE AND FREDDIE
Briefly, Fannie and Freddie are “Government Sponsored Entities” or “GSEs” that lend “liquidity” to the housing market by buying mortgages from commercial and mortgage banks. They then bundle and securitize those mortgages as “mortgage backed securities” and sell them on the secondary market.
Lenders who sell to Fannie and Freddie must underwrite loans that “conform” to Fannie and Freddie guidelines, and that is where the term “conforming loan” comes from.
Fannie and Freddie literally dominate the U.S. housing market, as almost 90% of all mortgages funded are “conforming loans.”
Here is a short article about Fannie and Freddie for those who might want to learn more.
PRIVATIZING FANNIE AND FREDDIE – DOES IT MATTER?
Fannie and Freddie have always been heavily regulated, but in 2008 the Federal Government took them over entirely in the form of “conservatorship,” in response to the mortgage meltdown and the huge losses incurred by both Fannie and Freddie. The Feds effectively “guaranteed” all Fannie and Freddie mortgage backed securities, and this was very effective overall for a few reasons: (1) it restored liquidity back to the housing market when most banks were afraid to lend right after the mortgage meltdown; and (2) the Feds have taken in far more in profits from Fannie and Freddie than they paid out to cover losses.
The Trump administration has been making noise about “privatizing” (taking them out of conservatorship and having less federal control) Fannie and Freddie for a few years now, and they are expected to release their plan after Labor Day. This is what is concerning some industry observers. B/c Fannie and Freddie are so dominant, they think any plans to change the GSEs could disrupt the market and push rates up. This recent Housing Wire article discusses this in more detail.
With all that said, I think the concerns are somewhat over-stated for a few reasons:
- With the economy so precarious, the Trump administration will not want a major disruption in the housing market.
- The Federal gov’t will still “guarantee” Fannie and Freddie mortgage backed securities, the Feds will remain heavily involved no matter what.
- Because Fannie and Freddie are so large and b/c everything is so politicized nowadays with so many powerful special interests involved, any proposed changes will take years to take effect, if they take effect at all.
- We are already seeing the non-GSE market start to revive, as our Jumbo rates are already much lower than our Fannie and Freddie rates for our strongest borrowers.
So, while I don’t expect big disruptions in the near future, this topic was well-worth a blog b/c we will all be hearing so much about it.
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