Three Democratic U.S. senators are asking the Trump administration to pause the plan to reprivatize Fannie Mae and Freddie Mac, suggesting that losing the government safety net might lead to a demand for higher mortgage rates. Others see a potential for lower rates once the market opens for competition.
In a letter to Federal Housing Finance Agency Director William Pulte on Friday, Aug. 29, Sens. Elizabeth Warren of Massachusetts, Cory Booker of New Jersey and Chuck Schumer of New York claimed Trump’s plan to sell shares of Fannie Mae and Freddie Mac could make mortgage rates go even higher.
“For example, some experts have estimated that mortgage rates could increase by up to 1% in the first year of privatization alone,” the letter states.
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Fannie Mae and Freddie Mac buy mortgages from lenders, bundle them into securities and sell these securities to investors. This provides lenders with money to issue more loans.
Before 2008, Fannie Mae and Freddie Mac were private companies. The housing crash leading up to the Great Recession led the government to take control of the entities. The goal was for them to pay back government loans and return to private operation, but it has taken much longer than expected.
Industry analysts raise concerns about risk and oversight
If Fannie Mae and Freddie Mac are privatized and no longer backed by the government, investors might worry the government won’t rescue them in a crisis. This added risk could lead investors to demand higher returns, which would raise mortgage rates for borrowers.
The senators’ letter cites a U.S. News article titled “Mortgages Under Trump: What Happens if He Privatizes Fannie Mae and Freddie Mac?” published in May.
In the article, Reed Letson, branch manager and owner of Elevation Mortgage, is quoted as saying, “If privatized, these institutions would operate like private companies without government backing. This would lead to stricter lending requirements and potentially higher mortgage rates, as they would need to generate higher returns for shareholders,” Letson said.
“Also, private lenders may be more prone to taking excessive risks during boom times, as we witnessed during the 2008 financial crisis. Without proper oversight, some lenders may offer loan products that borrowers don’t fully understand,” Letson added.
Letson also said the rates could jump by one percentage point very quickly after Fannie Mae and Freddie Mac become private but that after two to three years, the markets would re-adjust to private competition.
Alternate views and official response from FHFA director
The same article also offers another perspective: If Fannie Mae and Freddie Mac become private companies again, it might lead to more new ideas and more companies joining the mortgage market. This increased competition could help lower mortgage costs for borrowers.
The senators’ letter recommends that the Trump administration reduce housing costs by reinstating comprehensive fair housing and fair lending compliance requirements, as well as by promoting the development of affordable multifamily housing.
According to The Wall Street Journal, Pulte responded to the senators’ letter.
“Elizabeth Warren, Jerome Powell, and Joe Biden made housing unaffordable these last four years, and we are doing everything we can to reverse their damage, including removing mortgage fraud,” Pulte said in a statement.
