President Donald Trump promised Tuesday that the government would continue to provide a guarantee to mortgages backed by Fannie Mae and Freddie Mac should the mortgage-finance giants be privatized, a decision that could have implications for homebuyers.
He promised the safety net on Truth Social, his social media venture. Freddie Mac, more formally known as the Federal Home Loan Mortgage Corp., and Fannie Mae, the Federal National Mortgage Association, buy mortgages from banks, bundle them, and sell them to investors typically as securities, which provides funding that allows lenders to issue more loans. Loan guarantees — which cover projected credit losses from borrower defaults, administrative costs and a return on capital, according to the Federal Housing Finance Agency — would reduce the risk to lenders and the investors who purchase the securities.
"I am working on TAKING THESE AMAZING COMPANIES PUBLIC, but I want to be clear, the U.S. Government will keep its implicit GUARANTEES, and I will stay strong in my position on overseeing them as president," Trump wrote Tuesday night.
Freddie Mac and Fannie Mae enjoyed similar safety nets before they were in conservatorship, and they have them now under government stewardship, explained Joseph Gyourko, a real estate professor at the University of Pennsylvania's Wharton School of Business. The mortgage giants were placed in conservatorship after the 2008 housing and subprime loan crisis.
The difference, Gyourko said, is Trump’s promise to provide support if the agencies are released from government control and privatized. “What Trump is saying there will be some type of guarantee with a big collapse," he said. "The question for all of us is at what price."
A guarantee can be thought of as insurance. Future homebuyers, Gyourko said, would pay a premium upfront when getting a new mortgage or have some extra cost embedded into their monthly mortgage payment to safeguard Freddie Mac and Fannie Mae should there be another housing crisis.
That cost could also manifest as a higher mortgage rate, according to the FHFA. "A lender typically passes through to the borrower the cost of an upfront fee in the form of a slightly higher interest rate on the mortgage, since borrowers tend to choose not to pay points. Ongoing fees are also included in the interest rate charged to the borrower."
Privatizing Fannie and Freddie 'would take years'
Trump tried to privatize government-sponsored entities in his first term and has made it a pledge of his second.
The Mortgage Bankers Association, a Washington, D.C.-based network of financial real estate professionals, praised the promise of guarantees.
“MBA stands ready to work with the Trump administration on a thoughtful plan to end the conservatorships of Fannie Mae and Freddie Mac in a way that avoids any market disruption or increased costs for borrowers," Bob Broeksmit, MBA president, said in a statement to Homes.com News. "We also believe strongly that any release must include an explicit federal backstop — paid for by the [enterprises] — of their mortgage-backed securities to protect taxpayers, consumers, and our housing finance system.”
For now, Freddie and Fannie remain under government control.
Privatization would take years, said Don Layton, former CEO of Freddie Mac and current visiting fellow at New York University’s Furman Center for Real Estate and Urban Policy. He spoke about the potential likelihood of freeing Freddie and Fannie in April during a virtual discussion with the Harvard Joint Center for Housing Studies.
"This will have to be discussed and rolled out. Congress will weigh in for sure," Gyourko said, agreeing with Layton. "It won’t be next Tuesday."