Bringing Fannie Mae and Freddie Mac out of the government’s custody and back into private ownership would prove costly, driving up interest rates on mortgages by as much as a percentage point, according to a new analysis by prominent housing finance experts released Monday.
In the new paper, Urban Institute fellow and former Obama White House housing expert Jim Parrott and Moody’s Analytics chief economist Mark Zandi crunch the numbers to arrive at an estimate of how much going into the private market would cost the government-sponsored enterprises, and how they would have to adjust their fees in response.
“In releasing the GSEs into the private market again, we would release them into a very different regulatory and economic environment, and they would respond, not surprisingly, by charging very different mortgage rates,” write Parrott and Zandi, who do not support re-privatizing the two companies.
Fannie and Freddie buy home loans from lenders and package them into securities for investors to buy, charging investors for a government guarantee on the securities.
They were bailed out in late 2008 and received nearly $190 billion in taxpayer funds over the next few years. Congress has failed to pass legislation resolving their status and they remain in government hands even as they have returned to positive cash flow.
The situation has led to calls from private shareholders for the Obama administration or Congress to allow the companies to build up capital from their profits, all of which are currently taken by the Treasury, and to re-enter the private market.
The analysis conducted by Parrott and Zandi lays out the costs that would be associated with that maneuver.
First, the companies would have to build enough equity to satisfy regulatory demands. They would immediately receive heightened regulatory scrutiny as “systemically important” companies, alongside the biggest banks and large insurers that officials worry pose a threat to the financial system.
Then they would have to repay the government for the taxpayer support they received according to the terms of the bailout.
Altogether, it would take 18 years, in a favorable scenario, for Fannie and Freddie to build up the capital to the minimum levels that would be required of them, Parrott and Zandi estimate.
To make the payments to the Treasury that would be required, Fannie and Freddie would have to raise the fees they charge on insurance for mortgage-backed securities enough to raise the cost of mortgage credit to home buyers by 0.43 percent to 0.97 percent. Currently, the average 30-year fixed rate mortgage carries a 3.85 percent interest rate, according to Freddie Mac.
Parrott and Zandi note that the increased mortgage rates could be significantly higher than the average for some borrowers, as being regulated as private companies would make it more difficult for the government-sponsored enterprises to cross-subsidize borrowers.
