Fannie and Freddie: Post-Conservatorship Impacts

President Trump has indicated via social media that he is giving “very serious consideration” to taking Fannie Mae (Fannie) and Freddie Mac (Freddie) private. Some of us may be asking what exactly Fannie and Freddie do, and I’m sure most of us are asking what impact privatizing them could have on credit unions --- if it actually happens.

Who are Fannie Mae and Freddie Mac?

Fannie and Freddie are government sponsored entities (“GSEs”) that guarantee or insure most of the mortgages in the United States by buying them from mortgage lenders.  They then keep them or sell the loans as mortgage-backed securities to investors, creating a system that helps ensure mortgage lenders maintain enough capital to continue originating mortgage loans.  Both Fannie and Freddie were privately held before the mortgage crisis in 2008 when they were then placed into a government conservatorship to prevent their collapse.  This was intended to be a short-term measure; however, Fannie and Freddie have remained under that conservatorship since 2008.

What are the potential impacts on credit unions of privatizing Fannie Mae and Freddie Mac?

It’s hard to pinpoint exactly what consequences could result if Fannie and Freddie were to exit conservatorship because it largely depends on how the post-conservatorship structure is  implemented and regulated.  However, we can make some educated predictions on what effects it could have.

First, let’s focus on the good stuff.  Privatization could lead to greater market participation, possibly resulting in more competitive mortgage pricing.  If the post-conservatorship model allows for multiple guarantors or private competitors, credit unions could gain more options for selling mortgages and possibly result in better pricing.  A competitive environment could lead to innovations better suited for smaller or community lenders, like credit unions, which often get overlooked in a duopoly dominated by Fannie and Freddie. A model with multiple guarantors or competitors diversifies risk and dependence.

Next, credit unions benefit from predictable secondary market conditions. A well-structured exit from conservatorship with clear rules could stabilize long-term expectations around housing finance.  An exit from conservatorship might bring new governance structures with stakeholder input. Credit unions could get more say in how the secondary market is shaped.

However, if privatized, Fannie and Freddie would operate like private companies without government backing.  This could mean stricter lending requirements, higher interest rates, and even higher guarantee fees to reflect greater risk.  This could mean higher costs for credit unions to sell these loans.    

While multiple guarantors or private competitors may result in a more competitive market, it could also result in more varied, complex requirements for loan packaging, documentation, or eligibility, which could place a burden on smaller credit unions who lack the resources to handle this type of administrative strain. Competition could also result in big banks and mortgage lenders dominating under a privatized system, creating barriers for credit unions who don’t have the same volume or capital to compete on equal terms.  

We can’t say for sure if Fannie and Freddie will be removed from conservatorship and what the exact impacts will be if they are.  Privatizing these entities is consistent with the administration’s efforts to reduce regulation and the scope of government oversight, but we will have to sit tight and see how things unfold.  

If you have any questions concerning this topic, please contact the America’s Credit Union’s Compliance team at compliance@americascreditunions.org.

 

Tags
Consumer Lending
Federal Regulatory Compliance Counsel
America's Credit Unions