Removing Fannie Mae and Freddie Mac from government control, as Treasury Secretary-designate Steven Mnuchin would like to, could mean the two entities will do more to compete for lenders’ loans.
“Private companies can be more innovative and they can compete more for customer service, potentially, if we do this right,” said Mortgage Bankers Association CEO David Stevens.
But there could be downsides for lenders who sell to the two government-controlled secondary mortgage market giants as well, depending on how privatization occurred.
It has long been a concern that removing the government-related guarantee that global investors rely on in the large and liquid to-be-announced mortgage-backed securities market could disrupt a key source of funding.
If the TBA market were disrupted by the removal of that guarantee, it could cause home mortgage rates to skyrocket and constrain the range of borrowers that could find affordable loans.
“Privatization at its worst could mean private companies without a guarantee at all, but I’m not necessarily reading that in to what he said,” said Stevens. “There’s a pretty large battle ahead if he wants to go to pure privatization.”
The Treasury Secretary-designate would take steps to ensure Fannie and Freddie would be “absolutely safe so they don’t get taken over again” as they did during the last economic downturn.
One likely route through which privatization could occur without creating risk for the government could involve a broadening of existing risk sharing with the private sector and capitalization, while maintaining some form of government guarantee acceptable to key investors on the agencies’ MBS.
If this occurs in such a way that Fannie Mae and Freddie Mac find they could more broadly share their risk with the private market and become more adequately capitalized than they could under conservatorship, some think the two agencies could potentially buy a broader range of mortgages.
“The hope is with private capital they [the GSEs] could get back to buying more loans,” said Scott Olson, executive director of the Community Home Lenders Association. “That’s a positive thing that could result.”
Fannie and Freddie could buy more loans if semi-privatized with additional buy-in from private investors while the government retains a smaller, majority stake, said Rick Roque, managing director of Menlo, a mergers and acquisitions firm in Boston that facilitates mortgage banking retail development.
“It’ll open the product box [for lenders] and it will open up the credit box for consumers,” said Roque. He thinks private investors will be eager to invest in Fannie and Freddie given their recent profitability.
But Fannie and Freddie’s loan buying is unlikely to return to the levels seen precrisis, according to Stevens.
“You [the government] would perhaps restrict some of the hedge fund activities they [Fannie and Freddie] engaged in prior to conservatorship,” he said.
Another possible implication of privatization, depending on how it is executed, is that it could create advantages for larger players.
Community lenders rely on certain guarantee-fee and other government-related pricing controls to maintain parity between large and small lenders in loan purchases, so if privatization removed these, the pricing advantages bigger lenders had pre-conservatorship could return.
“G-fee or other pricing differentials based on volume would favor big institutions,” Olson said.
But Mnuchin has expressed interest in being supportive of small- and medium-sized businesses, which could suggest that he would be interested in preserving a level playing field.