A case for explicit government backing

Still, there is another side to the argument for re-privatization – one that leverages an affordability crisis already threatening to pull homeownership out of reach for millions of Americans.

“Fannie and Freddie now have affordable and multifamily goals,” Cowan says. “That will go away if they’re privatized.”

That’s not to say that Fannie and Freddie could not, in theory, maintain their own affordability goals – only that they’d have no mandate or incentive to do so.

Cowan likens privatizing Fannie and Freddie to calling for the privatization of Medicare.

“We have Medicare because the private sector did not provide affordable medical insurance for people over 65,” he explains. “The [mortgage] market, left without some sort of incentive, will probably write a lot fewer affordable mortgages.”

The reason that affordable loans could dwindle is one of revenue. Regardless of the loan amount, the costs of working with the GSEs is the same. So if a bank writes a $250,000 mortgage and sells it to Fannie or Freddie, which then packages it into a security and sells it to an investor, the amount of money and work required to process, assess the risk and finally broker the sale of the loan is the same as if the loan were for $500,000. The problem is the resulting cash flow from those mortgages. For smaller mortgages, all parties involved would be doing the same amount of work and making the same level of investment, but for a lower yield than if it were for the bigger loan. So as far as revenue goes, there would be a disincentive to write and insure affordable mortgages, and an equally clear incentive to focus on pricier mortgages.

Should a privatized Fannie and Freddie decide to maximize earnings in that way, Cowan predicts the damage would not be restricted to the lower end of the market, but would ripple upwards – possibly up to the market’s midsection.

“When a first-time homebuyer purchases a home, that home’s current occupant will likely move on to a more expensive unit,” he says. “Reducing the demand for entry-level units will keep more occupants from moving up, effectively draining the pool of buyers for slightly higher-priced properties. What I think you’ll see is not just an impact at the low end, but a slackening of demand that will creep up into the midranges of the market.”

By contrast, Guaranteed Rate’s Lizzie Garner says that although $500,000 loans are more lucrative, they’re also less common.

“Most Americans are not in a place to afford a $500,000 home. It would seem to me that much like anything else, we would not allow Fannie and Freddie, even if private, to run on unbridled capitalism,” she says, adding that the market would not allow for such a high-priced focus. “There are still all kinds of regulations, like Fair Lending and the Community Reinvestment Act, that would have to be satisfied.”

Garner has a point – there are several concrete regulatory guidelines that even private financial institutions are bound to. But those regulations do not control home prices, which in many major markets are either overvalued, greatly outpacing wage growth, or both.

Austin, San Antonio, Phoenix, Las Vegas and San Francisco are just five of the several U.S. markets that are more than 10 percent overvalued, according to Forbes; San Francisco has a median home price of more than $1.1 million. In contrast, Chicago has managed to remain relatively affordable compared to most other major U.S. cities, but as we recently reported, home prices are still cruising upward, while starter home inventory is steadily declining. As of Q4 2016, premium homes made up more than half of Chicagoland’s total available inventory, compared to less than a 25 percent share for starter homes. And according to ATTOM Data Solutions, home prices throughout Chicagoland have risen exponentially faster than wages; in Cook County, for instance, wages are only up 8 percent since the downturn, while prices are up 88 percent.

So even if a private Fannie and Freddie have an incentive to continue issuing affordable loans, home prices may force them to angle for bigger fish. A government-backed Fannie and Freddie would not be so inclined.