Reform efforts for Fannie Mae and Freddie Mac, the prodigious government-sponsored entities (GSE) 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 (such as Wells Fargo and Chase) make, and then, after guaranteeing the loan, sell mortgage-backed securities to investors to finance their 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? – To reiterate, 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 would such an under-the-hood approach 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 lead to lower borrowing costs for homeowners, according to an analysis by The Wall Street Journal.
4. It’s Important That 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. At the same time, though, the plan must pass muster with investors. After all, the investors who purchase Fannie and Freddie’s mortgage-backed securities are the people who keep the GSEs afloat, and if they are not willing to purchase the new, combined security, then the FHFA will have to abandon the plan and return to the drawing board.
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 don’t expect anything to change in the near term.