Dive Brief:
- U.S. Senators Bob Corker, R-TN, and Mark Warner, D-VA, are working on a change to mortgage finance companies Fannie Mae and Freddie Mac that would break them up, according to Bloomberg.
- The idea behind the overhaul is to end the companies’ duopoly and create more competition in the secondary mortgage market. Currently, the two companies combined account for more than $4 trillion in housing securities.
- Although this is a bipartisan proposal, it is unclear whether Warner and Corker could generate enough support in the Senate. There is some concern among affordable housing advocates that this kind of legislation could make it harder for low and middle-income borrowers to buy a home. Meanwhile, some smaller lender groups worry that the extra competition could let big banks seize a bigger stake in the secondary mortgage market.
Dive Insight:
Government Sponsored Enterprise (GSE) reform is among a long list of lawmakers' major legislation "to-dos," including healthcare and tax reform, so it’s unclear if or when Corker and Warner’s initiative to break up Fannie Mae and Freddie Mac will take center stage.
If GSE reform does pass, it could put the fixed-rate 30-year mortgage in jeopardy, as investors like Bruce Berkowitz told the Miami Herald. They say that if Freddie Mac and Fannie Mae were broken up, the fixed-rate, 30-year mortgage that makes homebuying possible for middle-class Americans would either become more expensive to obtain or not even be an option.
The loss of the fixed-rate 30-year mortgage could have a significant impact on the housing market, as close to 90% of homebuyers opted for this method of financing last year. With a 30-year mortgage, homeowners’ monthly payments are typically lower than they would be with a 15-year option, and the fixed rate means there aren’t any surprises when it’s time to pay the mortgage pay each month.
The GSE Mortgage Securities Purchase Program can be beneficial for GSEs who can discard some mortgage-backed securities from their portfolio and start to accumulate cash, which will let them provide more mortgage funds to the general public. Meanwhile, the government, which has invested in mortgage-backed securities, can get a substantial return on its investment by holding onto the securities until maturity. And the public benefits with access to financing it needs to purchase a home that it may not have been able to get otherwise.
Although GSEs can seem like a win-win for both sides, a fixed-rate, 30-year mortgage may not be as beneficial as some people think, Edward Pinto, co-director of the Internal Center on Housing Risk at the American Enterprise, wrote in Forbes. Pinto said a 15- or 20-year loan would help homeowners build wealth as they’d pay off the mortgage sooner and wouldn’t be burdened with the debt in their 50s or 60s.