If Fannie Mae and Freddie Mac go private, homeowners could face higher mortgage rates and stricter lending requirements due to increased risk and the absence of government guarantees, while also potentially leading to more volatile markets and challenges for smaller lenders competing with larger ones. The process would require significant capital to meet the needs of a private market and repay the government, and the loss of their implicit government backing would fundamentally alter their role in the housing finance system.
Potential Impacts on the Housing Market
• Higher Mortgage Rates:
Without the government backing that makes their mortgage-backed securities (MBS) less risky for investors, interest rates on home loans would likely increase to reflect the added risk for private investors.
Stricter Borrowing Requirements:
Private lenders would likely tighten eligibility requirements for borrowers, making it harder for some to qualify for a mortgage.
Increased Housing Costs:
Higher borrowing costs and more restrictive lending could make housing less affordable for many, particularly first-time and lower-income buyers.
Less Affordable Housing:
The increased costs for multifamily housing could threaten new affordable housing projects, limiting the availability of rental housing.
Impact on Market Operations and Lenders
Loss of Government Guarantee: The implicit government guarantee is crucial to the current system, making MBS attractive to investors. Privatization would remove this guarantee.
Market Volatility: A privatized market could be more volatile, potentially affecting the certainty and reliability of rate-lock agreements, which give buyers confidence in their quoted rates.
Challenges for Lenders: Small credit unions and banks may struggle to adapt to more complex requirements and administrative burdens under a privatized system, potentially giving larger, well-capitalized institutions a competitive advantage.
Investor Confidence: The change in status could sideline certain buyers of MBS, such as some institutional investors and overseas accounts.
