House Republicans are crafting a bill to end the 18-year-long conservatorship of Fannie Mae and Freddie Mac, advancing an idea pitched by President Donald Trump that could lead to taking the companies public.
Wisconsin Rep. Scott Fitzgerald, a Republican, said at a hearing of the House Subcommittee on Housing and Insurance on Tuesday that the bill would be put forth in the coming weeks to end the conservatorship of the two entities.
Trump floated taking the companies public late last year, in what could be a $30 billion initial public offering. That IPO could value them at a combined $500 billion, with 5% to 15% of their stock being sold. That caused significant debate as such a large move could impact mortgage rates, access to credit, and overall market stability.
Fitzgerald would also propose codifying some of the reforms that have taken place at the two mortgage giants since the Great Recession. These safeguards, such as increased capital standards, a cap on their investment portfolios, and the introduction of credit risk transfers, have made them less risky, he said.
But he also called the increase in conforming loan limits “alarming.” Those allow Fannie and Freddie to purchase mortgages over $1 million in high-cost areas.
“What we’re trying to do with the bill is tie increases in the loan limits to median income rather than the home price appreciation index,” Fitzgerald said. “That would in effect, put rates on a different path and they would increase slower.”
The bill would also establish a “utility model framework” for Fannie and Freddie, he added.
Realtor.com® previously reported Fannie and Freddie stockpiled $55 billion in mortgage principal balances—an increase of more than 30%—from May to December of last year. They could add an additional $100 billion this year, possibly in preparation for the IPO.
The risk and reward of Fannie and Freddie
Fannie Mae and Freddie Mac buy mortgages from lenders and bundle them into securities for investors to boost the availability of funds for home loans. The buyers include large investors like pension funds, 401(k)s, and insurance companies.
Fannie and Freddie’s speculation on subprime mortgages contributed to the financial crisis in 2008. They then had to be bailed out with taxpayer money to avoid collapse. They’ve been under government oversight ever since.
The Government Accountability Office estimated the two entities will issue $15 trillion in new guarantees in the next decade. Such a privatization carries both financial savings and costs to the government.
Privatizing the two entities also carries risks, experts told the subcommittee during its hearings.
Sharon Cornelissen, director of housing for Consumer Federation of America, said privatization could cause investors to demand higher returns because they perceive higher risks on the mortgage-backed securities. That could, in turn, drive up rates.
Trump said in August he wanted to see the companies retain federal guarantees under whatever new status they attain. But the president hasn’t elaborated in detail on his plans.
Robert Broeksmit, CEO of the Mortgage Bankers Association, encouraged Congress to codify some of the protections that government oversight has brought to the agencies.
“We think that Congress’ involvement in any ultimate release would put guardrails in terms of what activities they could pursue,” he said.
