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5 Key Details About the FHFA’s Plan to Reform Fannie Mae & Freddie Mac

by Peter Thomas Ricci

The FHFA is soldering on with its own plan to reform Fannie Mae and Freddie Mac.

Reform efforts for Fannie Mae and Freddie Mac, the humongous government-sponsored entities who play an integral role in the nation’s housing market, have been tossed around since the entities were taken over by the government in 2008, but congressional gridlock and political partisanship have all but guaranteed that no plans will come to fruition.

That all could change, though, with the recently announced plans of the Federal Housing Finance Agency (FHFA), the regulatory body that oversees Fannie and Freddie; in August, the FHFA unveiled a plan to combine the two entity’s securities, a proposal that could take shape without legislation.

Here are five of the key details behind the FHFA’s plan, which is more under-the-hood in its approach:

1. Securitization 101 – First, a brief overview of how Fannie and Freddie function: despite commonly being reported as such, Fannie and Freddie are not traditional lenders, and do not meet with homeowners and underwrite loans; instead, they guarantee loans that actual lenders (a la Wells Fargo and Chase) make, and issue mortgage-backed securities to investors to finance their own operations.

2. Combination Efforts – Because Fannie and Freddie are separate entities, though, they issue separate securities with different rules, and that is where the FHFA’s plan would take shape. In combining some aspects of Fannie’s mortgage-backed security with the disclosure framework of Freddie’s securities, the FHFA would reform the entities to issue a single mortgage-backed security to investors, though they would still go about guaranteeing loans in their own right.

3. How Does this Affect Housing? – So to be clear, the FHFA’s proposal would not combine Fannie and Freddie into one super GSE, but would instead combine the securities they issue to investors. How the heck would such investor mumbo jumbo affect housing? In short, those investors indirectly prop up housing by buying mortgage-backed securities and supporting the guarantee business of Fannie and Freddie, so if a single security went over well with investors, it could very well lead to lower borrowing costs for homeowners, according to an analysis by The Wall Street Journal.

4. Will Investors Bite? – The nice thing about the FHFA’s plan is that it is not dependent upon congressional approval, so it would not suffer the slings and arrows that have slowed the Johnson-Crapo reform bill to a crawl. As nice as that is, though, investors have to be willing to purchase the new, combined security; if they do not bite, the FHFA will have to abandon the plan.

5. Ain’t Nothing Quick These Days – Even without Congress involved, the FHFA’s plan would not be implemented in a speedy manner. According to a follow-up story by the Journal, a 60-day comment period for the plan ends in mid-October, but it will take several years for any changes to make their way to the housing market. So long story short? Don’t expect anything to change in the near term.

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