Fannie Mae and Freddie Mac have long been the cornerstone of the U.S. homebuying industry, turning what could have been a turbulent market into a stable and predictable market for people buying homes and investors who buy home loans as collateral securities.
But last week, President Trump appointed William Pulte, who led the federal housing finance institution, to remove the foundations of two mortgage companies when he removed 14 of the 25 current board members and served as chairman of the board. Mr. Pulte also removed executives from the company and FHFA, which regulated Fannie Mai and Freddy Mike. He signed an order Tuesday to end the Forrey and Freddie Mac program, aiming to help some first-time home buyers reduce payments and end fees.
These changes have been within federal protection since the foreclosure crisis in 2008 as Trump administration officials continue to propose negotiations to privatize the privatization of the mortgage giant.
While homebuyers don’t interact directly with Fannie Mai or Freddie Mai, their mortgages may be backed by one of them. Together, the companies support single-family residential loans up to $806,500, supporting 70% of the U.S. mortgage market. Taking them private may be a surprise for investors, but it may make buying a home in an affordable crisis more expensive.
“That means mortgage rates will rise – there will certainly be an increase,” said Laurie Goodman, founder of the Washington, DC think tank Urban Financing Policy Center.
What are Fannie Mae and Freddie Mae?
The Federal National Nortage Association or Fannie Mae was founded during the Great Depression, when nearly a quarter of Americans lost their foreclosure homes. Consortium is composed as part of the new deal, aiming to provide stability, liquidity and affordability to the collapsed housing market. Federal Home Loan Mortgage Company (Freddie Mac) was founded by Congress in 1970 to expand the secondary market for home mortgage loans. They are called government sponsored entities or GSEs.
Once the loan is offered to home buyers, it has the option to sell the loan on the secondary mortgage market, which is dominated by Fannie Mae and Freddie Mac. Income provides lenders with more money to issue more loans.
Once a loan is purchased, GSE can bundle it with other loans into mortgage-backed securities and sell those securities to investors including pension funds, commercial banks, state and local governments, as well as investment fund managers.
This system of selling mortgages in the secondary market adds huge liquidity to the lending industry and promotes a stable, reliable market. Fannie Mae, for example, created a 30-year fixed-rate mortgage. In other countries, mortgage rates change, interest rates rise and fall each year. “The existence of secondary markets is what makes Bankrate.com chief financial analyst Greg McBride said.
It is always implicit that the federal government supports Fannie Mae and Freddie Mac, making them attractive to investors. But in 2008, with the housing market crashing, the two GSEs faced bankruptcy after buying too many toxic subprime loans. The government rescued them, putting them in protection that continued to this day.
Pubic drumbeat
At the end of President Trump's first term, his administration began considering privatizing the two mortgage companies. This will be music for the ears of investors who bought stocks in GSE after the 2008 crisis.
To privatize, there will be an IPO where investors will buy stocks of these companies, remove them from government books, and provide cash injections to governments that have prioritized cost reduction. Wealthy investors and hedge fund managers who own shares at discounted prices can earn billions of dollars from their IPOs. One of the biggest supporters is billionaire investor William B. Ackman.
Recently, Trump officials have come up with this idea again. In January, Mr. Ackerman enacted a detailed privatization plan on X.
Interest rates may rise. The rate lock protocol may disappear.
While privatization will be a surprise for wealthy investors, it will raise interest rates for home buyers, Ms Goodman said. How much depends on how the company is privatized.
Why are the rates rising? Under the current system, mortgage-backed securities purchased by investors from GSE are guaranteed by the federal government, meaning that investors will be protected from losses if the borrower has too many borrowers mortgage their loans. In private markets without these guarantees, these securities may become more venture capitalized, resulting in higher interest rates. Lenders can also set stricter lending requirements, making it harder for some buyers to qualify for loans.
Ms Goodman said the rate lockdown agreement could be another kind of casualty in a more volatile market. Borrowers rely on rate lock-in agreements, which usually last between 30 and 60 days. These agreements give homebuyers confidence that the interest rates on their lenders will remain fixed as they complete the slow process of final purchase. Buyers are able to lock in that speed because their lenders know that once the sale is over, the loan can be sold easily. However, if these conditions change in the privatized market, lenders may hesitate to lock in the rates, or charge more for the option. For borrowers, this means more uncertainty at the closing ceremony, which could add to the deal.
“Everyone is talking about privatization, like you flip the switch,” Ms. Goodman said. “In fact, there are a lot of questions you can answer before you go to an IPO.”
What does this mean for existing homeowners?
For homeowners, the privatization of Fannie Mae and Freddie Mae will not affect existing mortgages, as the terms they agree to when signing the loan will not change. However, Fannie and Freddie also bought refinancing loans, so homeowners who want to refinance may also have to compete with the new market.
