If the federal government is to go through with its proposed privatization plans for mortgage servicing giants Fannie Mae and Freddie Mac, any changes must be thought through very carefully to ensure the availability of safe and affordable mortgages isn’t disrupted.
That was the view of experts who came together for a forum hosted by the National Association of Realtors on Friday, in response to last week’s proposal by the Trump administration that it’s considering privatizing the GSEs. The proposal is part of a larger plan by government to reform the secondary mortgage market, RealtorMag reported.
Fannie Mae and Freddie Mac dominate the U.S.’s home mortgage financing sector, but reform of the market has been a long time coming, on the agenda ever since the last financial crisis 10 years ago.
In the midst of that crisis, the government decided to place the two GSEs under a federal conservatorship in order to help revive their financial situation after suffering massive losses. Both Fannie and Freddie have now stabilized and paid back the financial aid they received. However, the Trump administration says it’s necessary to put both organizations on a sustainable long-term path.
The forum saw private sector executives from the capital markets, finance and mortgage sectors come together with academics and public policy specialists to discuss the proposed changes. There was a consensus that any changes must be thoughtful and introduced gradually in order to avoid disruption to a market that represents around 20 percent of the U.S. economy. However, the experts differed on their vision of how to encourage greater participation in the mortgage-backed securities market by the private sector. This is important as the mortgage-backed securities market enables lenders to sell home loans and in turn, generate more capital for additional loans instead of keeping it tied up in their portfolios.
Some of the opinions expressed included a call by Pat Lawler, a scholar with the American Enterprise Institute, for a gradual reduction in Fannie and Freddie’s market share by lowering the maximum conforming loan limit over a period of time. Meanwhile, Andrew Davidson of Andrew Davidson & Company, which provides risk analytics for residential mortgage-backed securities, said the current system of tinkering as little as possible with Fannie and Freddie is working well.
Experts also praised the innovation of credited credit risk transfers, known as CRTs, as these enable Fannie and Freddie to move credit risk off their books in a way that attracts private investors to the market. This and other innovations have helped to stabilize the market while providing opportunities for the private sector to get back into the mortgage securities market.
The NAR said it holds the position that federal government should remain in the market in order to guarantee the availability of safe, affordable and well-underwritten mortgages, while also working to encourage private sector participation in the market.