Summary: The next Trump government may change housing policies, causing real estate instability and a major influence on the mortgage industry. The incoming administration may resume efforts to privatize Fannie Mae and Freddie Mac, two mortgage giants that consume vast loan volumes. The government should avoid reorganizing enterprises in a way that generates uncertainty or scares investors, say economists and housing experts. Mortgage rates are rising despite Fed cuts, a rare occurrence. With over half of American home loans guaranteed, Fannie and Freddie are well-established. The architecture set up over 15 years ago was never designed to last, and Trump's aides are expected to finish what they started before the crisis. Congress might remove Fannie and Freddie's conservatorship by overhauling the mortgage-finance system and guaranteeing Fannie and Freddie or future competing securities.
Many analysts predict a significant shift in housing policy from the next Trump government would cause upheaval in the already unstable real estate sector and rock the mortgage market.
Widely thought to be resuming a campaign to eliminate Fannie Mae and Freddie Mac, the two national mortgage behemoths consuming massive loan volumes from government control, is the new administration. During his first term, President-elect Donald Trump gave that project top attention, but the epidemic derailed those preparations. With mortgage rates already high and affordability at a crisis point, economists and housing specialists now advise the government to be extremely cautious not to reorganize the businesses in a way that increases uncertainty or spook investors.
Michael Fratantoni, chief economist of the Mortgage Bankers Association, remarked, “It's really a question, not so much of ‘whether,' but ‘how' the change is implemented.”
The mortgage market is showing unusual behavior already. Following the 30-year fixed rate peak last fall, it dropped as the Federal Reserve started cutting interest rates. About 8 percent was the peak. Driven by a robust economy and the continuing reality that there aren't enough homes to go around, mortgage costs are now once more rising despite fresh Fed cutbacks.
The companies are well ingrained in American home finance operations, and without them the popular 30-year fixed rate mortgage would not exist. Fannie and Freddie buy and package mortgage loans rather than directly making them. The firms together guarantee over half of the current house loans.
In an attempt to stabilize financial markets and maintain mortgage credit flow, the George W. Bush government essentially nationalized the businesses during the crisis in the mortgage markets in 2008. Under the Federal Housing Finance Agency (FHFA), Fannie and Freddie have stayed in a sort of legal and financial purgatory known as “conservatorship,” ever since. On Wall Street, the securities they sell to investors are regarded as safe since, under the terms of their federal bailout agreements, the corporations are entitled to large government support should need.
The architecture established more than 15 years ago was never meant to be permanent. While some analysts and legislators have lately adopted a “don't fix what's not broken,” Trump's aides are generally anticipated to strive to complete what they started before the epidemic struck. Many conservatives contend that organizations like Fannie and Freddie need buffers against the political goals of a sitting White House and that the government shouldn't directly oversee such massive enterprises.
Under legislation, Calabria stated, “Fannie and Freddie are expected to be fixed.” “It is better to do this in a calm environment than to try to fix something in the middle of a crisis.”
There are several ways ending Fannie and Freddie's conservatorship might go. Congress might enact a legislation reforming the whole mortgage-finance system and provide an explicit guarantee on securities issued by Fannie, Freddie or future rivals. However, that kind of Capitol Hill participation is quite rare following repeated attempts devoid of any success.
Another, more likely alternative is the Trump administration avoids Congress. Under one scenario, the Treasury Department and the FHFA decide to release the businesses once they keep their earnings for another year or two. In return, businesses would have to consent to pay continuous fees to taxpayers for the government's backstop—necessary for their business model. Any choice without such a backup would send markets crazy.
Trump has other financial interests, hence changing Fannie and Freddie was not a declared aim of his campaign. But since Election Day, both firms' shares have been on an upward rampage, a clear indication of the level of market expectation for company releases.
Still, others in the mortgage business worry about a sudden shift in the market, including a reduction in the government backup, which would raise or lower mortgages. This is so because buyers of Fannie and Freddie's mortgage-backed securities may demand more interest rates, particularly in light of no clear government backup for the mortgage bonds. Chief economist of Moody's Analytics, Mark Zandi, who also counseled the Kamala Harris campaign, said such an action would leave the 30-year fixed rate mortgage “diminished.”
“Whatever scenario you pick — it's just worse than the status quo,” Zandi remarked.
Source: Trump admin’s expected Fannie Mae, Freddie Mac shift could raise mortgages – The Washington Post