Magazine article American Banker

GSE Privatization Would Mean More Competition between Fannie and Freddie

Magazine article American Banker

GSE Privatization Would Mean More Competition between Fannie and Freddie

Article excerpt

Byline: Bonnie Sinnock

Removing Fannie Mae and Freddie Mac from government control, as Treasury Secretary-designate Steven Mnuchin would like to, could mean the two entities will do more to compete for lenders' loans.

"Private companies can be more innovative and they can compete more for customer service, potentially, if we do this right," said Mortgage Bankers Association CEO David Stevens.

But there could be downsides for lenders who sell to the two government-controlled secondary mortgage market giants as well, depending on how privatization occurred.

It has long been a concern that removing the government-related guarantee that global investors rely on in the large and liquid to-be-announced mortgage-backed securities market could disrupt a key source of funding.

If the TBA market were disrupted by the removal of that guarantee, it could cause home mortgage rates to skyrocket and constrain the range of borrowers that could find affordable loans.

"Privatization at its worst could mean private companies without a guarantee at all, but I'm not necessarily reading that in to what he said," said Stevens. "There's a pretty large battle ahead if he wants to go to pure privatization."

The Treasury Secretary-designate would take steps to ensure Fannie and Freddie would be "absolutely safe so they don't get taken over again" as they did during the last economic downturn.

One likely route through which privatization could occur without creating risk for the government could involve a broadening of existing risk sharing with the private sector and capitalization, while maintaining some form of government guarantee acceptable to key investors on the agencies' MBS.

If this occurs in such a way that Fannie Mae and Freddie Mac find they could more broadly share their risk with the private market and become more adequately capitalized than they could under conservatorship, some think the two agencies could potentially buy a broader range of mortgages. …

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