Fannie and Freddie, Donald and Joe

by Alex Talcott, Daniel Barli, and Malia Reed

Fannie Mae and Freddie Mac back approximately half of all new mortgages in the United States. The Trump administration has made it clear that it plans to reduce the federal government’s role in the activities of the two giants, over a decade since the last housing crisis. However, if the president loses his re-election campaign in November, the likelihood of any privatization-type reforms passing is slim. This effort, led by Mark Calabria, who was appointed chief of the Federal Housing Finance Administration (FHFA) by President Trump last year, has a number of implications for homebuyers and real estate investors alike.

It is difficult to predict what the U.S. housing market would look like without existing rather extensive government involvement. Fannie Mae and Freddie Mac are responsible for the popularization of the most common home loan in America – the 30-year fixed-rate mortgage. This loan type provides homebuyers with low monthly payments and stable interest rates, making the purchase of a home far more affordable than it otherwise would be. Without them, mortgage interest rates could be adjusted based on the market, as seen in many other countries, leaving homeowners with a bill they cannot afford to pay. An increase as small as one percent in a homeowner’s mortgage interest rate could add hundreds of dollars to their monthly payment, an amount most non-savers don’t have readily accessible in an emergency even. 

Depending on how the Trump administration plans to reshape Fannie Mae and Freddie Mac, the U.S. housing market has the potential to retrench to its status before the two giants existed. Before 1938, when Fannie Mae and Freddie Mac were formed, homebuyers were responsible for a far larger down payment than they are now, often 50 percent or more of the home’s purchase price. Mortgages also were of shorter terms, generally between five and 10 years, with a large balloon payment due at the end. Opponents of the Trump administration’s housing finance reforms argue that the shrinkage or privatization of Fannie Mae and Freddie Mac could result in an imminent and substantial decrease in housing affordability for millions of Americans, making it far more difficult for first-time and middle-income homebuyers to (ever) actually purchase a home. Some experts, advocates, and activists in between politically have remained wary of George W. Bush era easy-money that hastily facilitated the American Dream of homeownership.

The reforms are on the radar of certain real estate investors, some of whom purchase securities from Fannie Mae and Freddie Mac. These mortgage-backed securities are safe to the extent that Fannie Mae and Freddie Mac take on most of the default risk; but without them, non-bank lenders, which provide approximately 50 percent of new U.S. mortgages, may find it more difficult to provide prospective homebuyers with loans. Non-bank lenders are often the only avenue first-time and middle-income homebuyers can take to get mortgage loans, as banks tend to attract and approve applicants of greater means.

Other administrative action is underway as well. The federal Consumer Financial Protection Bureau began formal rulemaking last month to do away with hard debt-to-income ratios. The National Association of Realtors is onboard.  Also last month, the Supreme Court’s ruling in Department of Homeland Security v. Regents of the University of California (the DACA/Dreamer case) exemplified the authority of administrative law and that All the President’s picks aren’t always predictable, regardless of who might occupy the Oval Office.

Alex Talcott and Daniel Barli are attorneys and the Co-Leading Partners of Lexdan LLC private real estate capital. Malia Reed is a commercial real estate summer intern with SVN|Angelic and an undergraduate political science student at the University of Notre Dame.