Fannie Mae and Freddie Mac Shutdown Could Jolt US Housing Market

For years, we’ve been reading about the U.S. Department of the Treasury’s intent to wind down the Government Sponsored Enterprises known as Fannie Mae and Freddie Mac. Treasury’s goals were to make sure that every dollar earned was used to benefit tax payers and to support the flow of mortgage credit during the transition out of the housing bubble burst. The wind down has been in effect for years, with accelerations being introduced in regards to the percentage of annual reduction.

Prominent, well-respected Wall Street analyst Dick Bove said this week that without these organizations, there would be few buyers for 30-year fixed rate mortgages. While banks are clearly comfortable offering variable rate 5 and 10-year mortgages, apparently most financial institutions cannot make money on 30-year fixed rate home loans. If the majority of them were replaced, moving forward, by these shorter maturities, it would increase monthly payments for borrowers and make housing cost less overall, which would send a shockwave through the U.S. housing market.

The reason banks can’t make money on the standard 30-year fixed rate? New rules on capital reserves and securitizing mortgages.  The two GSEs buy mortgages from banks on the secondary market so that financial institutions are free to invest in new markets, but with them gone, banks would be stuck with the loans and have nowhere to offload them, severely limiting their ability to divest if needed.

The question analysts are asking now is who is going to step in and fulfil the role of the GSEs, or how can the necessity of that role be eliminated without causing even greater harm to a provably fragile financial system.

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