One of the hottest topics in the housing market right now is Fannie Mae and Freddie Mac. The topic of conversation is whether or not they’ll come out of government conservatorship in the near future. It’s something we’ve been hearing plans about for a while, but nothing is set in stone yet. Their coming out of conservatorship could have some pretty big effects on the housing market and the appraisal industry. So, we’re all closely watching what’s happening.
Current Plans for Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac have been under government conservatorship since 2008. They were in trouble during the housing crisis and were given more than $187 billion in bailout money.
This has not only kept them afloat but has also kept the system working to deliver consumers low-cost mortgages. Fannie and Freddie control the terms for the majority of U.S. mortgages; they currently secure around 70% of U.S. loans. This incentivizes lenders to keep loans affordable so that Fannie and Freddie will buy these conforming loans and package them into securities. The current state of Fannie and Freddie keeps housing affordable and less cyclical for everyone.
The Trump administration, under FHFA director Mark Calabria, has plans to release Fannie and Freddie from government conservatorship while reducing risk and raising capital. This makes shareholders happy because it would give them the opportunity to increase rates and fees and increase their profits. Which is something they’re not able to do under conservatorship.
For months, there’s been speculation that Fannie and Freddie would have an IPO to raise capital. If Fannie and Freddie have an IPO, it would be a huge, revolutionary thing for the industry (more on that in a minute).
How the Election Changes Things
We may see some changes in Fannie and Freddie’s current trajectory given the pending change in administrations. Most likely, the Biden administration will allow Fannie and Freddie to spend more time in conservatorship as the administration focuses on containing COVID-19.
The Trump administration has about two months to make changes that will keep Fannie and Freddie on the current trajectory towards an IPO. If they run out of time, that would be a big setback for shareholders. But, would hold the status quo for the housing market.
Of course, another factor in this is something we don’t yet know—who controls the Senate. A Republican-controlled senate would be less likely to block the end of the conservatorships.
Another Option for Moving Forward
One possibility that has been floated is that Fannie and Freddie could be released from government conservatorship as regulated utilities. That would cap their profits and keep rates cheaper than if they were private companies.
If the companies were to become regulated utilities, it would reduce pressure to hike the guarantee fees for buying loans and packing them into securities. Profits would be capped and interest rates would be cheaper, making the housing market less cyclical.
If we’re going to continue to provide access to loans for more people and support underserved communities, things may need to stay similar to how they are now. Since making housing more accessible and fair is a priority of the Biden administration, this utility option seems like a likely scenario.
Effects of an IPO on the Housing Market
If Fannie and Freddie were to fail again, mortgage liquidity would be impacted, significantly hurting the housing market. That means everyone wants to make sure they have the resources they need to stay solvent.
If Fannie and Freddie are to exit conservatorship, they’ll need to raise up to $240 billion in capital to achieve equal footing with other lending institutions. They currently have less capital than other banks because they borrow at rates lower than the rates available to banks.
But Fannie and Freddie’s focus on a single product increases their risk—they’d have to increase pricing or tighten underwriting standards if they go public. These higher fees and interest rates would lead to more competition in the housing market and may change the current mix of loans. If Fannie and Freddie stop securing some types of loans, like cash-out refinances, second home loans, or landlord loans, we may see some shifting in the market. These changes could bring more non-QM lenders to the table, lowering lending standards in the industry.
A Fannie and Freddie IPO would bring some competition back into our housing market. It may also bring more options for the appraisal industry to be granted the ability to make changes to how we do things, something that we think is very much needed. We want appraisal methods that utilize current technology, which will improve turn times and make getting a mortgage more efficient. It would be easiest for us to do this with private investors, so we’re excited about the prospect of more players in the market. No matter what happens, we’re likely in for an interesting ride! If you’d like to stay up to date on the housing industry, make sure to stay tuned to our blog.