Republicans Crafting Bills to End Conservatorships for Fannie Mae and Freddie Mac
House Republicans are drafting a bill to end 18 years of Fannie Mae and Freddie Mac bailouts, advancing an idea established by the President. Donald Trump that can lead to taking companies public.
Wisconsin Rep. Scott Fitzgeraldwho is a Republican, during a hearing of the House and Insurance Committee on Tuesday that the bill will be introduced in the coming weeks to end the maintenance of these two organizations.
Trump floated taking the companies public late last year, in what could be an initial $30 billion offering. That IPO could value them at $500 billion, with 5% to 15% of their stock being sold. That caused a lot of controversy as such a big move could affect mortgage rates, access to credit, and overall market stability.
Fitzgerald will also suggest documenting some of the changes that have taken place at the two mortgage giants since the Great Recession. These safeguards, such as additional capital levels, limits on their investment portfolios, and the introduction of credit risk transfer, have made them less dangerous, he said.
But he also called the increase in compliance with loan limits “scary.” Those allow Fannie and Freddie to buy more than $1 million worth of mortgages in the most expensive areas.
“What we’re trying to do with this bill is increase the mortgage obligations to the median income rather than the home price index,” Fitzgerald said. “That’s actually going to put prices in a different direction and they’re going to go up a little bit.”
The bill would also establish a “relief model framework” for Fannie and Freddie, he added.
Realtor.com® previously reported that Fannie and Freddie accumulated $55 billion in principal mortgage balances—a 30% increase—from May to December of last year. They could add another $100 billion this year, possibly in preparation for an IPO.
The risk and reward of Fannie and Freddie
Fannie Mae and Freddie Mac buy mortgages from lenders and bundle them into securities for investors to increase the availability of mortgages. Buyers include large investors such as pension funds, 401(k)s, and insurance companies.
Fannie and Freddie’s speculation on subprime loans contributed to the 2008 financial crisis. They had to be bailed out with taxpayer money to avoid collapse. Since then they have been under government surveillance.
The Government Accountability Office has estimated that the two agencies will issue $15 billion in new guarantees over the next decade. Such privatization brings both financial and cost savings to the government.
Making these two organizations secret also has risks, experts told the subcommittee during its hearing.
Sharon Cornelissendirector of housing for the Consumer Federation of America, said the exchange could make investors seek higher returns because they see higher risk in mortgage-backed securities. That could drive prices up.
Trump said in August that he wants to see companies maintain government guarantees under any new status quo. But the president has yet to elaborate on his plans.
Robert BroeksmitCEO of the Mortgage Bankers Association, urged Congress to include some of the protections that government regulation has brought to organizations.
“We think the involvement of Congress in any exemption will set the tone for what jobs they can pursue,” he said.
