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The Trump administration unveiled its plan to privatize Fannie Mae and Freddie Mac, the two mortgage giants that nearly collapsed during the 11-year-old financial crisis and were saved at a total cost of $ 187 billion. dollars for taxpayers.
The administration's plan calls for an end to Fannie and Freddie's government control, thereby reducing risks for taxpayers, while preserving real estate buyers' access to fixed-rate mortgages. a 30-year term, pillar of housing finance. The Treasury Department released the plan on Thursday and submitted it to President Donald Trump, who called him in March.
Although this is not in the public eye, both companies play a vital role in the housing market. Together, they guarantee about half of the US $ 10 trillion home loan market. While both companies have become profitable since their rescue in 2008 and have repaid their bailouts, the Treasury said in its report that "the housing finance system is in dire need of reform".
"Although they remain essential to the functioning of this system, they are not yet subject to capital requirements or other regulatory requirements tailored to the risks they pose to financial stability" , says the report. "This lack of reform has left taxpayers exposed to new bailouts."
The administration initially asked Congress to legislate to reform the housing finance system and give back to private companies, which operate under so-called government conservation powers, private shareholders. But Congress has not acted, and now officials are announcing that they will take administrative action for fundamental change, ending the conservatives Fannie and Freddie.
The new plan would give back to private companies, but sponsored by the government. Their profits would no longer be paid to the Treasury but would be used to build up their own funds to protect against future losses.
What are Fannie Mae and Freddie Mac?
Before the Great Depression of the 1930s, mortgage financing was mainly provided by life insurance companies, banks and savings banks, with reduced government support. Fannie was established in 1938 to buy loans issued by the Federal Housing Administration. Freddie was created in 1989.
They call government sponsored businesses. Before they took control in 2008, they were private companies, but still had an implicit guarantee that the government would intervene and save them in case of failure. This is what happened after the collapse of the real estate market and the wave of mortgage defaults.
Companies do not do real estate loans. They buy them from banks and other lenders, group them into securities, guarantee them against default and sell them to investors. As companies are under government control, investors are eager to buy "safe" securities.
And because Fannie and Freddie manage nearly half of US home loans, they are important to homeowners and potential buyers, though some do not see their footprint.
What is behind the privatization push?
Administration officials say the government should play only a limited role in housing finance and that the current system is once again leaving taxpayers exposed to bailouts. Some lawmakers, Republicans and Democrats, share this view.
Yale's economics professor, Robert Shiller, Nobel Prize laureate of memory famous for calling the real estate bubble of the mid-2000s, said that he had not read the details of the government's reform plan, but said Friday that there had long been a debate about his involvement. in the accommodation. "The question is whether the government should be long-term," he told CBS MoneyWatch. "This is not American, for the government to invest in houses."
On Thursday, senior treasury officials told reporters that the government's broad power in this area meant that the Federal Housing Finance Agency could determine who was taking out a mortgage, the price and terms of the loan, how it was going care and maintenance, and what happens if a borrower defaults.
The housing finance reform proposed by the administration "will protect taxpayers and help Americans who want to buy a home," said Treasury Secretary Steven Mnuchin in a statement. "An effective federal housing finance system will also significantly contribute to continued economic growth under this administration."
What does the administration propose?
The plan contains concrete details on housing finance, but the central change puts an end to the Conservatives. Officials have not given any timetable for administrative action.
Mark Calabria, the director of FHFA, said recently that it would not be before, and probably after 2020. Certain conditions must be met for companies to be "ready to leave," he said. In particular, they must ensure that companies have sufficient capital to operate and continue in the event of a severe economic downturn.
Other changes described in the plan must be approved by Congress. These include replacing Fannie and Freddie's affordable housing goals with "tailored support" for first-time homebuyers and low- and middle-income borrowers.
What do the critics say?
Some critics fear that the new capital requirements imposed on businesses will push them to increase their mortgage guarantee fees, which could lead to increased borrowing costs for homebuyers.
Senator Sherrod Brown of Ohio, a member of the Senate Banking Committee and Democrat, described the new plan as "a new gift from the industry that would destabilize the economy … and limit the economy. access of workers to mortgage loans ".
"President Trump's housing plan will make mortgages more expensive and harder to obtain," Brown said in a statement.
Administration officials recognize that it is difficult to predict the impact on borrowing costs. But they maintain that by lifting the restrictions imposed by the government, the plan would likely expand the supply of mortgage loans and possibly reduce costs.
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