The Trump Administration’s urgency to free Fannie Mae and Freddie Mac from federal control has some on Wall Street worried that it might happen without the U.S. government providing an explicit backstop of the companies’ $4.7 trillion of mortgage securities.
Credit rating companies, financial firms and even real estate agents claim that such a move would be a disaster. They’re warning that ending Fannie and Freddie’s conservatorships absent a clear guarantee of their securities might prompt big asset managers to curtail their bond buying. That in turn could dry up some of the financing that keeps the mortgage market humming, making it harder and more expensive for consumers to get home loans, they say.
“Conservatorship is safe. An explicit guarantee is safe. Keeping Fannie and Freddie as they are and privatizing them is a dangerous experiment,” said Michael Bright, president of the Structured Finance Industry Group and the former acting president of Ginnie Mae. He co-authored a 2016 plan that proposed turning Fannie and Freddie into lender-owned insurers that could issue mortgage securities with federal backstops.
An explicit guarantee can only be provided by Congress, which has failed for more than a decade to agree on a fix for Fannie and Freddie. Concern that the administration might try to release the companies with no federal backstop has largely been triggered by their regulator, Federal Housing Finance Agency Director Mark Calabria. An appointee of President Donald Trump, he suggested in media interviews last month that he thought Fannie and Freddie could survive without one by building up capital buffers and reducing market risk.
‘Limited Guarantee’
Calabria said Thursday at a conference in Washington that if lawmakers create a guarantee -- something he hasn’t formally asked them to do -- it should be “limited.”
Treasury Secretary Steven Mnuchin, who Calabria will collaborate with on many reforms, has said that he would prefer there be an explicit backstop, though he hasn’t ruled out bypassing Congress to free Fannie and Freddie. Mnuchin has also been clear that he wants an overhaul of U.S. housing-finance policy to accompany any push to end the conservatorships, indicating he might be hesitant to make any bold moves. Treasury is working on a plan for what to do with Fannie and Freddie that is expected to be released in the coming weeks.
Spokesmen for the FHFA and Treasury didn’t reply to requests for comment.
The reason why a federal guarantee of mortgage bonds is important is because of the essential role that Fannie and Freddie play in the housing market by buying loans from lenders and then packaging the debt into securities. If asset managers were to curb their bond buying -- due to worries that they could lose their interest and principal -- mortgage rates would likely rise and credit might become less available to home buyers.
Curtailed Buying?
Without an unequivocal guarantee “there’s a whole host of buyers that currently buy these mortgage-backed securities that may not be able to, or may not want to,” said Brian Quigley, a fixed-income portfolio manager at Vanguard Group, which manages $5.6 trillion.
The warning shows the potential dangers for Trump in trying to tackle such a complicated issue that touches heavily on voters’ finances. The president’s chances of winning a second term will likely hinge on the health of the economy next year, and tampering with Fannie and Freddie poses risks with questionable political upside.