Fannie Mae and Freddie Mac, the two formerly private mortgage giants, have been in limbo since 2008 when the federal government took them into conservatorship.
Since then, Congress and President Barack Obama have proposed sweeping reforms of Fannie and Freddie—conservatives demand the government-sponsored enterprises (GSEs) be privatized if not abolished altogether, while progressives favor a more gradual phasing out of the two mortgage giants, which have become critical to the housing market recovery during the past several years.
There seems to be no hurry among policymakers to decide the fate of Fannie and Freddie, but it looks increasingly as if the GSEs are here to stay. Fresh evidence of this came last month, when the Consumer Financial Protection Bureau (CFPB) endorsed guidelines Fannie and Freddie now use in making new mortgage loans. The details are complicated, but in essence the bureau's much anticipated qualified mortgage rule exempts Fannie and Freddie from the strict guidelines private bankers must now follow to ensure that borrowers can repay their loans.
This could mark a turning point in the GSEs' fortunes. Here's a few reasons why there probably won't be a bold overhaul of Fannie and Freddie anytime soon:
1. Fannie and Freddie no longer pose systemic risk. When the GSE's were taken into federal conservatorship in 2008, they were saddled with nearly $15 billion in losses. Since then, Freddie and Fannie have cleaned up their act. The loans they make now are strictly underwritten and the lax lending practices of the last decade are long gone. Even mortgages with loan-to-value ratios above 80 percent require that private mortgage insurers take the loss in case of a foreclosure, instead of the U.S. taxpayer. In short, today's reconstructed GSEs are a force for stability, not excessive risk, in housing markets.
2. The GSE's have a new mandate. Before the crisis, the GSEs saw their primary fiduciary responsibility as being to shareholders. They aimed at making profits, the higher the better. Now, under conservatorship, their mandate is to pay back taxpayers for the government bailout. Instead of piling up debts, Fannie and Freddie are profitable again with a reported combined net income of $4.74 billion as of the third quarter of 2012. With the agencies paying back the taxpayers and not drowning in red ink, the political pressure for reform has lost its urgency.
3. Home prices are recovering. Although there is a difference between a sustainable housing recovery and home prices increasing, almost a year of gains has translated into fewer underwater borrowers, fewer foreclosures, and a stronger housing market. That means fewer economic headwinds and a stronger outlook for Fannie Mae, Freddie Mac, and the FHA, which back more than 90 percent of new home loans.
4. Interest rates will stay low. The Federal Reserve intends to keep rates low for the next few years or until the unemployment rate drops to 6.5 percent. But with most American consumers opting for long-term, affordable fixed rates on home loans, there's too much interest-rate risk for banks and lenders. Rates are certain to go up in the future and banks cannot afford to keep so much long-term, low-fixed rate debt on their books. That's why the only way for banks to keep making loans today is to sell them to Fannie and Freddie.
5. Qualified mortgage rule. After the bubble burst, Congress passed the Dodd-Frank Act, which created the CFPB among other things, and tasked it with issuing guidelines for mortgage lenders in determining the ability of borrowers to repay their loans. If lenders follow those guidelines, they are exempted from lawsuits by borrowers who default on their loans. Those that fail to lend prudently will not have this "safe harbor" protection.
Since loans underwritten through QM guidelines contain a huge exception for loans that follow Fannie, Freddie and the FHA guidelines, there will be little incentive for banks to stop selling their loans to the GSEs and using the FHA guarantee any time soon. The QM rule takes reforming the GSEs squarely off the table for the foreseeable future.
With a rebounding housing market, calls for abolishing or privatizing Fannie and Freddie, will probably abate. Time will tell, but for now Fannie and Freddie aren't going anywhere.