The $10 Trillion Question: How Privatizing Fannie Mae and Freddie Mac Could Impact Your Mortgage

The future of housing affordability in America hangs in the balance as policymakers consider privatizing Fannie Mae and Freddie Mac, the government-sponsored enterprises that underpin the $10 trillion mortgage market.

• Fannie Mae and Freddie Mac don't lend directly to homebuyers but purchase mortgages from lenders and package them into securities
• The government took control of these entities during the 2008 financial crisis, but the arrangement was meant to be temporary
• Privatizing these enterprises without proper safeguards could increase mortgage rates by 20-40 basis points, or even a full percentage point without government backing
• Higher mortgage rates would price more Americans out of homeownership and potentially trigger broader economic slowdown
• Possible solutions include explicit government guarantees or a hybrid model where privatized GSEs pay fees for government backing
• The debate represents a fundamental question about the proper role of government in ensuring housing affordability

Think about how important housing is for individuals, families, and the entire economy. The decisions made about Fannie Mae and Freddie Mac will affect all of us in ways we might not expect.

📰 Read more about this topic in our latest article:  https://sunrisecapitalgroup.com/treasurys-push-to-privatize-fannie-and-freddie-what-homeowners-need-to-know/

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Chapters

• 0:00 Introduction to Fannie Mae and Freddie Mac
• 3:45 The 2008 Crisis and Government Takeover
• 5:47 Risks of Privatization on Mortgage Rates
• 7:44 Economic Impact of Rate Increases
• 9:55 Possible Solutions and Future Options
• 12:00 Key Takeaways and Closing Thoughts

Transcript

Speaker 1: 0:25

Okay. So you know how you're scrolling through the news and you see those headlines about the housing market and maybe something about Fannie Mae and Freddie Mac pops up and you're like, oh, that's just financial stuff, doesn't really affect me, right. But what if I told you that that seemingly small thing could actually determine whether or not you can buy a home?

Speaker 2: 0:45

Oh, wow.

Speaker 1: 0:46

Or even what happens to the mortgage that you already have.

Speaker 2: 0:49

Okay, now you've got my attention.

Speaker 1: 0:50

Yeah, so that's exactly what we're going to be digging into today this whole push to privatize Fannie Mae and Freddie Mac.

Speaker 2: 0:59

Absolutely, and it's a big deal because you know these are two huge players in the housing market that most people don't really think about, Right?

Speaker 1: 1:06

Right yeah.

Speaker 2: 1:06

They're kind of behind the scenes, but they're really the foundation of how we finance housing in America.

Speaker 1: 1:12

OK, so let's break this down a little bit. Fannie Mae and Freddie Mac they're not actually the ones giving you the mortgage, are they?

Speaker 2: 1:20

No, no, not like.

Speaker 1: 1:21

They're not like walking into a bank.

Speaker 2: 1:23

Exactly right. Think of the more like government sponsored enterprises. We call them GSEs for short.

Speaker 1: 1:30

Oh, okay, GSEs.

Speaker 2: 1:31

Right and their main job is to buy mortgages from lenders. Okay, so you know. You go to your bank, you get a mortgage. Fannie and Freddie come in, they buy that mortgage from the bank.

Speaker 1: 1:42

Okay.

Speaker 2: 1:43

And then they bundle a whole bunch of mortgages together into these things called mortgage-backed securities. Okay, and then they sell those securities to investors.

Speaker 1: 1:52

All right. So why is that whole process so important?

Speaker 2: 1:56

Well, because it makes mortgages more attractive to a wider range of investors. Oh, and that means more money flowing into the housing market, which helps keep those mortgage rates down.

Speaker 1: 2:08

I see.

Speaker 2: 2:08

You know, for us regular folks.

Speaker 1: 2:09

Yeah, yeah.

Speaker 2: 2:10

Trying to buy a house.

Speaker 1: 2:11

Right.

Speaker 2: 2:11

It's all about creating liquidity in the market, right, right. So it's easier for banks to get cash, which means they can lend more money to people who want to buy homes.

Speaker 1: 2:20

Got it, so they're kind of like the middleman.

Speaker 2: 2:22

Yeah, you could think of it that way. They're the ones kind of greasing the wheels of the whole housing finance system, and you know we're talking about a $10 trillion market here, 10 trillion yeah. Wow, that's huge. That's like half the entire US economy.

Speaker 1: 2:37

I mean, that's basically saying that even tiny little changes in how Fannie and Freddie operate could have a massive ripple effect.

Speaker 2: 2:45

Exactly, and that's exactly what we're trying to understand here today. What are the implications of this privatization push, especially the concern that it could make mortgage rates go up?

Speaker 1: 2:55

All right, so let's set the stage here. What's the situation with Fannie and Freddie right now?

Speaker 2: 3:00

OK, so rewind back to 2008. Bish, the financial crisis.

Speaker 1: 3:04

Yeah.

Speaker 2: 3:05

Remember that.

Speaker 1: 3:05

I try not to.

Speaker 2: 3:06

Well, fannie and Freddie, they had a lot of these really risky loans on their books and when the housing market tanked, Uh-oh yeah, not good. They were in big trouble, like on the verge of collapse.

Speaker 1: 3:18

So what happened?

Speaker 2: 3:19

The government had to step in.

Speaker 1: 3:20

Right.

Speaker 2: 3:21

Basically took them over to prevent this total meltdown of the financial system.

Speaker 1: 3:25

Okay.

Speaker 2: 3:26

And that's what we call conservatorship.

Speaker 1: 3:27

So the government basically said like all right, we're taking the wheel for a little bit.

Speaker 2: 3:31

Yeah, exactly, and the idea was to stabilize them. Okay, get them back on their feet and then eventually return them to private ownership.

Speaker 1: 3:38

Okay, so this was supposed to be a temporary thing, exactly A little pit stop, right. But here we are, over 15 years later.

Speaker 2: 3:45

And they're still under government control.

Speaker 1: 3:46

Still under government control, under government control, still under government control. So why is that? I mean, I've heard people say that they're doing much better now. They're making money. They've even paid back the government. So what's the holdup?

Speaker 2: 3:57

Well, on the surface it seems logical to just let them go back to being private companies. But here's the thing we have to consider the state of the housing market right now.

Speaker 1: 4:09

Okay.

Speaker 2: 4:11

Affordability is at a record low.

Speaker 1: 4:13

Yeah, it's tough out there.

Speaker 2: 4:15

It is. Mortgage rates are around 6.7%.

Speaker 1: 4:18

I've seen that.

Speaker 2: 4:19

Which is already making it impossible for a lot of people to buy a house, Absolutely. So the big question is how can we release Fannie and Freddie from government control without making this affordability crisis even worse?

Speaker 1: 4:32

Without like sending mortgage rates through the roof.

Speaker 2: 4:34

Exactly.

Speaker 1: 4:34

Okay, so let's talk about that risk. Why would privatization even lead to higher mortgage rates in the first place?

Speaker 2: 4:42

Well, it all comes down to risk.

Speaker 1: 4:43

Right.

Speaker 2: 4:44

In the market. How much risk are investors willing to take?

Speaker 1: 4:47

Right yeah.

Speaker 2: 4:48

So right now, even though Fannie and Freddie are in this conservatorship, there's this understanding, you know this kind of unspoken agreement that if things went really bad again, the government would probably step in and bail them out.

Speaker 1: 5:01

Right.

Speaker 2: 5:02

It's not a law or anything.

Speaker 1: 5:03

It's just kind of an assumption.

Speaker 2: 5:04

Yeah, it's like you know, the government's got their back and that makes investors feel safer buying those mortgage-backed securities. I was going to say they know they're not going to lose all their money. But if Fannie and Freddie were totally private companies with no government guarantee, investors would see that as way riskier.

Speaker 1: 5:21

Yeah, that makes sense. So the more risk there is, the more investors are going to want a higher return on their money and that higher return basically gets passed on to homebuyers as higher mortgage rates.

Speaker 2: 5:31

Exactly, and that's what makes this whole situation tricky.

Speaker 1: 5:35

Yeah.

Speaker 2: 5:35

We've got this guy, Mark Sandy. He's the chief economist at Moody's.

Speaker 1: 5:38

Oh yeah, I've heard of him.

Speaker 2: 5:39

Yeah, he's a smart guy and he's looked into this whole privatization thing really carefully.

Speaker 1: 5:44

OK.

Speaker 2: 5:45

And he estimates that even with this implicit guarantee, just the market believing that the government might step in, mortgage rates could still go up by 20 to 40 basis points.

Speaker 1: 5:56

Okay, 20 to 40 basis points. For anyone who's not super familiar with that financial jargon, can you explain what that actually means for, like your average person?

Speaker 2: 6:06

Yeah, sure. So a basis point is just one hundredth of a percent.

Speaker 1: 6:09

Okay.

Speaker 2: 6:09

So if your mortgage rate was 6%, a 20 basis point increase would bump it up to six point two percent. Got it Doesn't sound like a lot, right, yeah, but over the life of a mortgage that can add up to thousands of dollars in extra interest, wow, now Zandi also looked at what would happen if there was absolutely no government backing at all.

Speaker 1: 6:29

Oh boy, this is the doomsday scenario.

Speaker 2: 6:32

Basically, and in that case he thinks rates could jump by over a full percentage point. Full percentage point 100 basis points.

Speaker 1: 6:40

OK, so we're tanking like rates above 7 percent. Yeah, wow.

Speaker 2: 6:45

And we haven't seen rates that high consistently since before the 2008 crash.

Speaker 1: 6:50

Yeah, that would be a huge shock to the system.

Speaker 2: 6:53

It would.

Speaker 1: 6:53

So what would that kind of a rate spike do to the housing market? Oh man, I mean the wider economy in general.

Speaker 2: 6:59

It would be pretty bad. Higher rates mean people can't borrow as much money, right? So folks who could barely afford a house at 6.7% are definitely priced out at 7.7%. Right Fewer people buying homes means fewer homes being sold. Oh yeah, that makes sense, which could lead to home prices going down, and all of that spills over into the rest of the economy.

Speaker 1: 7:20

Right, because if people aren't buying houses, they're not buying furniture, they're not hiring contractors.

Speaker 2: 7:25

Exactly, it's a domino effect. Yeah, less spending, slower economic growth.

Speaker 1: 7:29

It's a big deal. So this isn't just some abstract problem for Wall Street. This is something that could affect everyone.

Speaker 2: 7:35

Absolutely, and you know it's interesting we see this same debate happening in other areas too. Like what Like student loans, health insurance?

Speaker 1: 7:43

Oh, yeah, right.

Speaker 2: 7:44

These are all areas where the government plays a role in making things more affordable and accessible.

Speaker 1: 7:50

Uh-huh.

Speaker 2: 7:51

And the big question is how much should the government be involved? How much risk should they be taking on?

Speaker 1: 7:58

Right, because we don't want another 2008,. Right, exactly when things get out of control. Yeah.

Speaker 2: 8:02

That was a really tough lesson about what can happen when you have these entities operating with this implicit safety net, but not enough oversight. Right, right, and that's something to keep in mind with this privat safety net, but not enough oversight.

Speaker 1: 8:12

Right right.

Speaker 2: 8:13

And that's something to keep in mind with this privatization push.

Speaker 1: 8:16

Yeah.

Speaker 2: 8:17

Are we setting ourselves up for that same kind of problem again?

Speaker 1: 8:20

It's like walking a tightrope.

Speaker 2: 8:22

It is.

Speaker 1: 8:22

Yeah.

Speaker 2: 8:23

Trying to find that balance.

Speaker 1: 8:24

And it seems like with housing, the stakes are especially high. I mean, this is where people live, right, this is where they raise their families. This is where they raise their families. This is, you know, a huge part of their wealth, stability.

Speaker 2: 8:38

Homeownership is a big deal. It's the American dream right. Yeah, it's tied to so many things Wealth building, family stability, community development, right. So if we mess with the mortgage system, the consequences could be really serious.

Speaker 1: 8:48

Okay, so let's say this privatization thing does move forward. Are there any ways to make sure that mortgage rates don't skyrocket?

Speaker 2: 8:59

Well, most experts agree that some kind of government guarantee would be crucial. Okay, like an explicit guarantee.

Speaker 1: 9:07

Explicit, so not just this unspoken thing.

Speaker 2: 9:10

Right, not just something that's actually written down. Exactly Written into law. So everyone knows like okay, the government's got our back.

Speaker 1: 9:16

Got it.

Speaker 2: 9:17

That would give the market more certainty and help keep borrowing costs down. Okay, but getting that kind of legislation passed, oh man, with Congress the way it is.

Speaker 1: 9:28

That's a tough one.

Speaker 2: 9:29

It would be a battle.

Speaker 1: 9:30

So what are some other options on the table?

Speaker 2: 9:32

Well, there's this idea of a hybrid model.

Speaker 1: 9:35

Hybrid model.

Speaker 2: 9:35

Yeah, so you'd have these privatized GSEs.

Speaker 1: 9:39

Right, yeah.

Speaker 2: 9:39

But they would pay a fee to the government.

Speaker 1: 9:42

Okay.

Speaker 2: 9:43

In exchange for a formal guarantee.

Speaker 1: 9:45

Oh, so it's kind of like a compromise.

Speaker 2: 9:46

Yeah, exactly.

Speaker 1: 9:47

Right.

Speaker 2: 9:48

Trying to get the best of both worlds.

Speaker 1: 9:49

Right.

Speaker 2: 9:50

The incentives of private ownership.

Speaker 1: 9:51

Uh-huh.

Speaker 2: 9:52

But also the stability of government backing. Got it, but the details would be super important.

Speaker 1: 9:57

Like how much would this fee be?

Speaker 2: 9:59

Yeah, exactly how much would they have to pay and would there be enough oversight to prevent, you know, the kind of risky stuff that led to the 2008 crisis? Right right, so it would require a lot of careful thought and negotiation.

Speaker 1: 10:17

OK, so it sounds like the big takeaway here is that privatizing Fannie and Freddie is really complicated.

Speaker 2: 10:19

Yeah, it is.

Speaker 1: 10:19

It sounds good in theory.

Speaker 2: 10:21

It does.

Speaker 1: 10:21

But there could be some serious unintended consequences Right, especially if it's not done super carefully.

Speaker 2: 10:27

Exactly. Various unintended consequences, right. Especially if it's not done super carefully. Exactly the system we have now relies on this trust that the government's there to support it. If you weaken that support, you risk messing everything up, right. Higher mortgage rates.

Speaker 1: 10:41

Yeah.

Speaker 2: 10:41

Fewer people able to buy homes.

Speaker 1: 10:43

Yeah.

Speaker 2: 10:43

It's a balancing act.

Speaker 1: 10:44

It's a tough one.

Speaker 2: 10:46

It is.

Speaker 1: 10:46

So, to sum it all up, what we're really talking about here is this tension.

Speaker 2: 10:50

Yeah.

Speaker 1: 10:51

This desire to get Fannie and Freddie back into private hands after all these years versus the risk of making housing even less affordable.

Speaker 2: 10:59

Exactly, and this isn't just some abstract policy debate.

Speaker 1: 11:02

No.

Speaker 2: 11:03

This is something that could directly affect you.

Speaker 1: 11:05

Right.

Speaker 2: 11:05

Whether you're trying to buy a house or you already have a mortgage, yeah or you just care about the stability of the housing market.

Speaker 1: 11:11

And I think that brings us to a really important question for all of our listeners. Yeah what's that? Thinking about how important housing is for individuals, for families, for the whole economy.

Speaker 2: 11:22

Right.

Speaker 1: 11:22

What's the right amount of government involvement?

Speaker 2: 11:24

Yeah, how much is too much Right of?

Speaker 1: 11:26

government involvement, yeah. How much is too much Right, and who ends up taking on the most risk under different models? These are really important things to think about as this whole debate continues.

Speaker 2: 11:34

They are.

Speaker 1: 11:35

So thanks for listening everyone. We hope you found this deep dive informative and that it gave you some food for thought.

Speaker 2: 11:41

And if you want to explore this issue further, we'll be sure to link to some additional resources.