Fannie and Freddie's Uncertain Future, Explained
April 24 2019 - 11:29AM
Dow Jones News
By Christina Rexrode and Heather Seidel
Fannie Mae and Freddie Mac are the heart of the U.S. housing
system.
They're also a topic of intense debate.
The Trump administration recently asked for plans to overhaul
Fannie and Freddie. It also installed a new official to oversee the
two companies, and he says he wants to put them on the road toward
returning to private hands. Yet lawmakers have spent the last
decade arguing about how big they should be and how much the
government should be involved in their operations. Some have said
they shouldn't exist at all.
So what's the hangup?
Fannie and Freddie make mortgages more readily available and
more affordable. The 30-year, fixed-rate mortgage essentially owes
its existence to them. But some argue that the private market could
fill this role more efficiently. Right now, there isn't much
agreement on either side of the aisle on how to change the
government's involvement in mortgages or what the market would look
like without the two companies.
The government created Fannie in response to the Great
Depression to encourage banks to make more home loans. Fannie and
Freddie buy mortgages from banks, alleviating some of the risk that
lenders have to take on.
Almost half of mortgages made today are backed by Fannie and
Freddie.
Critics of this system say the private sector, not the
government, should be filling this role, and the White House has
said it wants more competition. Private firms make up just a tiny
portion of this market now.
Those who support the current setup point out that private firms
tend to exit whenever a market starts to turn sour. That means
credit can dry up at a time when the economy is already struggling,
making a downturn worse.
Supporters also say the government has a responsibility to keep
housing affordable. For many Americans, owning a home has been the
most important way to build wealth.
This is how the two companies work:
Why is this process so important?
Banks are wary of making mortgages they have to keep on their
books. For one reason, they're then on the hook if a borrower stops
paying.
Banks are also worried about interest rates rising and falling.
Say a lender gives you a mortgage with a 4% fixed interest rate,
and then rates rise. The bank can't then increase the rate on your
mortgage. That's good for you but bad for the bank, which is now
holding a mortgage that is less valuable.
But lenders aren't so concerned about these risks if they sell
the mortgages.
If lenders couldn't sell their mortgages, they would probably
make fewer of them, charge higher interest rates and require bigger
down payments.
That means that without Fannie and Freddie, few lenders likely
would offer the 30-year, fixed-rate mortgage.
This product is practically considered an American birthright.
But in other countries, where mortgage systems are funded
differently, the 30-year, fixed-rate mortgage isn't widely
available.
Mortgages in the U.S. were also much different before Fannie was
created. Back then, mortgage loans often had floating rates and
typically lasted for just five or 10 years, with a big balloon
payment that came due at the end.
Some economists argue that allowing mortgage rates to fluctuate
with the broader market would help borrowers. Rates tend to fall in
a recession, which would give home buyers a discount on their
monthly payment when they most need it.
But Americans tend to like the certainty of fixed rates. Even a
1-point change in your mortgage's interest rate can add -- or
subtract -- hundreds of dollars from your monthly payment.
U.S. borrowers flocked to adjustable-rate mortgages in the
run-up to the financial crisis, but they returned to the 30-year,
fixed-rate loan after the housing bubble burst in 2008. Today, more
than 90% of U.S. home buyers choose this product.
Write to Christina Rexrode at christina.rexrode@wsj.com and
Heather Seidel at heather.seidel@wsj.com
(END) Dow Jones Newswires
April 24, 2019 11:14 ET (15:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
Federal Home Loan Mortgage (QB) (USOTC:FMCC)
Historical Stock Chart
From Aug 2024 to Sep 2024
Federal Home Loan Mortgage (QB) (USOTC:FMCC)
Historical Stock Chart
From Sep 2023 to Sep 2024