Posting on Truth Social, President Trump proposed initial public offerings for government-sponsored entities (GSEs) Fannie Mae and Freddie Mac. The GSEs have flip-flopped between the public and private sectors a few times over their history.
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These enterprises buy mortgage loans and bundle them together in mortgage-backed securities that are then bought and traded on public markets. They provide standardized loan programs and reduce risk for lenders and capital investors, which in turn lower borrowing costs. Read on below to see what happens if they revert to being publicly-traded companies, as the president proposes.
Also here’s how Dave Ramsey thinks Trump is impacting the housing market.
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Mortgage Market Volatility and Higher Rates
In the short term, expect some confusion in the mortgage market. That will add to perceived risk and reduce appetite for mortgage-backed securities — which translates to higher loan rates.
“Privatizing Fannie and Freddie could add volatility to the mortgage market and that uncertainty would trickle down to sellers,” said Samuel Wooten, owner of Two Rivers Properties. “If rates climb or fewer buyers qualify, homes will sit longer on the market.”
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Tighter Lending Standards, Fewer Buyers
Fannie Mae and Freddie Mac’s mission extends beyond making money. But mortgage banker Bill Dallas of Dallas Capital notes that their mission would change along with their ownership. “The GSEs’ current mission is to facilitate equitable and sustainable access to homeownership and quality, affordable rental housing across America. Private shareholders in the public market demand risk-averse returns and growth however.”
So how would they reduce risk? By reducing exposure to lower-income, lower-credit and first-time homebuyers.
Real estate expert Austin Glanzer with 717 Home Buyers doesn’t see that working out well for sellers in lower- and middle-income markets. “Tighter lending standards would reduce the buyer pool, especially in markets with lower-income or first-time buyers. For sellers, that means homes would sit on the market longer and some sellers will have to cut prices to attract offers,” he said.
Lower Home Prices
Higher mortgage rates and tighter lending standards both push home values in the same direction: down.
“Higher mortgage rates reduce how much buyers can afford,” explained Alexander Kalla, realtor at Keller Williams Bay Area Estates. “Tighter loan standards reduce the total number of qualified homebuyers. Both would bring down home sales and put negative pressure on home prices.”
That said, President Trump stated the government will continue to guarantee the loans bought and bundled by Fannie and Freddie. After a combined bailout of $191.5 billion back in the Great Recession based on a Library of Congress report, the two GSEs repaid the Treasury Department $301 billion in dividends before Treasury released them of that “profit sweep” obligation in 2019. The Treasury Department still owns stakes in both GSEs, in the form of preferred equity.
Taking the two GSEs public could raise a significant amount for government coffers, as a one-time bump. But it remains to be seen just how involved the government stays in regulating their mission — and leaving guarantees in place for underserved homebuyers.
Editor’s note on political coverage: GOBankingRates is nonpartisan and strives to cover all aspects of the economy objectively and present balanced reports on politically focused finance stories. You can find more coverage of this topic on GOBankingRates.com.
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This article originally appeared on GOBankingRates.com: Trump Wants These 2 Big Mortgage Companies To Go Public: 3 Ways That Could Impact Home Sellers