What Privatizing Fannie and Freddie Could Mean for Your Mortgage

Exploring the impact of privatizing

Privatizing Fannie and Freddie, two key players in the U.S. housing market, has sparked significant debate among policymakers, economists, and homebuyers alike.

These government-sponsored enterprises (GSEs) have been under federal conservatorship since the 2008 financial crisis, and discussions about their future have reignited with recent political shifts.

What does privatization actually mean for your mortgage? Could it lead to higher rates, or will it bring benefits to the housing industry?

In this article (Skip to...)

• What are Fannie and Freddie?
• Why are they under conservatorship?
• What does privatization mean?
• Impact on mortgage rates
• Potential risks beyond rates
• Arguments in favor of privatization
• What should buyers do?

What are Fannie Mae and Freddie Mac?

Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are GSEs created to bring stability and liquidity to the housing market.

They don’t lend directly to homebuyers; instead, they purchase mortgages from lenders, package them into mortgage-backed securities (MBS), and sell them to investors. This process helps ensure that lenders have the funds to issue more loans, making mortgages widely accessible to homebuyers across the country.

Together, these two companies form the foundation of the U.S. housing market, collectively backing approximately 70% of all mortgages in the country.

Why are Fannie and Freddie under conservatorship?

During the 2008 financial crisis, Fannie Mae and Freddie Mac faced massive losses due to their exposure to risky mortgage-backed securities. The federal government stepped in, injecting billions of taxpayer dollars to prevent their collapse.

Since then, both entities have operated under federal conservatorship by the Federal Housing Finance Agency (FHFA).

As conservator, the FHFA assumes the roles and responsibilities typically held by the management, boards, and shareholders of Fannie Mae and Freddie Mac, which continue to function as business corporations.

Ultimately, the FHFA retains supreme authority over all aspects of the Enterprises’ operations. This arrangement reassures investors that if the GSEs were to fail, the government would cover their obligations—effectively reducing risk and keeping mortgage rates lower for consumers.

What does privatization mean?

Privatization would involve ending government conservatorship and turning Fannie Mae and Freddie Mac into fully private companies. This means:

• No More Government Guarantee: Without federal backing, these entities would no longer have the same “risk-free” status.
• Market-Driven Operations: As private companies, their profitability would depend on market forces and investor confidence.

While proponents argue that privatization could reduce federal liabilities and increase market efficiency, critics warn of higher mortgage rates and potential economic risks.

Potential impact on mortgage rates

One of the most significant concerns about privatizing Fannie and Freddie is its potential effect on mortgage rates. Some economists warn it would make mortgages pricier.

Realtor.com Chief Economist Danielle Hale predicts ending the conservatorship would put upward pressure on mortgage rates.

According to Hale, “Mortgage rates would likely move higher, because right now, under conservatorship, there is a government guarantee that if Fannie and Freddie were to get into any trouble, they would be bailed out by the government, and thus investors would be bailed out,” she says. “Which means consumers currently get lower mortgage rates, because investors are willing to lend without demanding as much of a risk premium.”

It’s true. Without a government guarantee, Fannie Mae and Freddie Mac could likely face higher borrowing costs. This could trickle down to consumers, as lenders would likely raise rates to account for the additional risk.

Investors would demand higher returns to compensate for the lack of federal backing, further driving up mortgage rates.

While estimates vary, some analysts predict that privatization could add as much as a quarter of a percentage point—or more—to mortgage rates.

Higher mortgage rates could exacerbate affordability challenges in an already strained housing market, making it harder for many buyers to enter the market.

Potential risks beyond rates

In addition to the potential for higher rates, critics fear that privatizing Fannie and Freddie could introduce other consequences.

Erosion of Stability

The current government oversight imposes strict standards on the loans that Fannie Mae and Freddie Mac can purchase. Privatization could loosen these standards, potentially leading to riskier lending practices reminiscent of the pre-2008 era.

Economic Vulnerability

If privatized GSEs mismanage risk or face financial instability, it could create ripple effects throughout the broader economy.

Execution Challenges

Transitioning Fannie Mae and Freddie Mac from federal control to private entities is a complex process that requires both administrative and legislative action. Missteps in execution could disrupt the mortgage market.

Arguments in favor of privatizing Fannie and Freddie

Proponents of privatization argue that government conservatorship has outlived its purpose.

Some experts suggest that privatization would allow Fannie and Freddie to investigate merging with other primary mortgage actors. This would give Fannie and Freddie the ability to expand their activities and create efficiency gains.

Other reasons privatization supporters back the idea include:

1. Reduced Federal Liabilities: Privatization would remove trillions of dollars in potential liabilities from the federal government’s balance sheet. It reduces the burden on taxpayers who currently backstop the GSEs in case of financial trouble.
2. Market Efficiency and Competition: Advocates believe a privatized system could foster innovation and competition, potentially benefiting consumers in the long term. A private market could lead to more efficient allocation of resources, better pricing models, and potentially lower costs over the long term.
3. Increased Profitability for Shareholders: Private shareholders, who have seen limited returns under conservatorship, could stand to gain significantly from privatization. Privatization could unlock the value of these entities, benefiting investors and bolstering confidence in the housing market.
4. Reduced Government Involvement in Housing: Proponents argue that the government’s role in the housing market should be limited to avoid distorting market dynamics. Privatization would shift responsibility from taxpayers to private investors and lenders.
5. Encouraging Private Sector Innovation: Without government oversight, Fannie and Freddie could explore new, creative mortgage structures to meet evolving consumer needs. Private control could lead to the development of new products aimed at increasing homeownership opportunities.

Why privatization may not happen soon

Despite renewed discussions, many experts believe privatization is unlikely in the near term. Here’s why:

• Political Hurdles: Privatizing Fannie Mae and Freddie Mac requires congressional approval, and reaching a consensus on such a divisive issue is no small feat.
• Economic Climate: With mortgage rates near 7% and affordability at its lowest point in decades, policymakers may be reluctant to introduce changes that could further destabilize the housing market.
• Unclear Consumer Benefits: While privatization may benefit shareholders, the advantages for homebuyers remain uncertain. Many housing experts agree that the risks of higher rates and potential market instability outweigh the potential rewards.

What should homebuyers do?

Privatizing Fannie and Freddie has a long way to go. It may not happen at all.

Most experts concur that there’s no need for panic, as they believe that if privatization occurs, it is likely still years away.

If you’re concerned about higher rates in the future resulting from privatization, you may want to consider a fixed-rate loan over an adjustable-rate option. Keep an eye on policy developments and consult with a mortgage lender to understand how any of the changes might affect your homebuying plans.

Otherwise, if you’re planning to buy a home, the usual homebuying advice remains relevant.

Maintain Your Credit

Be sure to pay your bills on time, keep your credit utilization low, and monitor your credit report for accuracy. Remember, you’re entitled to a free credit report each year from each major bureau (Equifax, Experian and Transunion) via AnnualCreditReport.com

Shop Around

Compare offers from multiple lenders to find the most competitive rates. A quarter percent lower rate could save you thousands of dollars over the life of your loan.

Get Pre-approved

Knowing exactly what you can afford will help you stay within your budget. A pre-approval letter will also show home sellers you’re serious.

Save For a Down Payment

Having enough for your down payment typically tops the list as the most challenging aspect to buying a home. Figure out how much you’ll need based on your price range and loan program. And don’t forget to account for closing costs, which typically range between 3-5% of your loan amount.

Final thoughts on privatizing Fannie and Freddie

It’s unclear what impact privatization may have on homebuyers and if it could have detrimental effects on the housing industry.

For now, Fannie Mae and Freddie Mac continue to play a critical role in making homeownership accessible. As the debate unfolds, staying informed and working with a knowledgeable mortgage professional will be key to navigating the ever-evolving homebuying landscape.