Moody’s economist: Privatizing GSEs could destabilize mortgage market

Experts say Fannie and Freddie are working well. Why disrupt the system?

Moody’s economist: Privatizing GSEs could destabilize mortgage market

Experts say Fannie and Freddie are working well. Why disrupt the system?
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The incoming-Trump Administration’s zeal to release Fannie Mae and Freddie Mac as private companies would create inefficiencies in the best-case scenario and, in the worst, “undermine the health and stability of the mortgage market,” according to experts from the Urban Institute and Moody’s Analytics.

Moody’s Analytics’ Chief Economist Mark Zandi and Urban Institute fellow Jim Parrott wrote that privatizing the government-sponsored enterprises (GSEs) presents several risks and considerable hurdles, and the effort is not worth it.

The GSEs “are working remarkably well in conservatorship,” according to the brief.

Parrott and Zandi argue that as private companies Fannie Mae and Freddie Mac will struggle to maintain the same level of global confidence in their mortgage-backed securities, which have implied government backing while the GSEs operate in conservatorship.  

The two argue that releasing the GSEs without an act of Congress that explicitly defines the government’s role and backing could lead to “a less liquid, less stable, and much more cyclical housing finance system.”

Fannie Mae and Freddie Mac finance more than half of U.S. mortgages by purchasing loans and securitizing them.

Since being taken over as bankrupt private companies during the financial crisis 16 years ago, the GSEs have been tightly regulated by the Federal Housing Finance Agency.

While Fannie Mae and Freddie Mac remain in conservatorship, their securities are highly attractive, nearly risk-free investments.

Congress would need to pass legislation that grants an “explicit government guarantee” prior to releasing the GSEs to replicate the same stable system, Zandi told Scotsman Guide in an email Wednesday.  

Zandi also noted that while under government control the GSEs have transferred much of the risk of their operations from taxpayers to the private sector yet can respond to crises and downturns such as during the Covid pandemic when the GSEs halted foreclosures.

“Releasing the GSEs administratively will be highly disruptive to the mortgage and housing markets and thus, the broader economy,” Zandi said. “And the question is why do it?  To what end?  The current housing finance system is working exceptionally well.”

Wall Street, though, has been betting the Trump Administration will put an end to the conservatorship, as shares in the enterprises have surged since the election.

Author

  • Victor Whitman

    Victor Whitman is a contributing writer for Scotsman Guide and a former editor of the publication’s commercial magazine. 

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