From the moment mortgage giants Fannie Mae and Freddie Mac were placed into government conservatorship during the financial crisis, there’s been talk of how to set them free again. With the Trump administration laying out its plans for the government-sponsored enterprises (GSEs) last fall, it seems like 2020 could bring big changes to the backstops of the mortgage industry.

What’s at stake

Between the two of them, Fannie and Freddie own about half of all new residential mortgages in the United States — close to $5 trillion in American home loans. That’s why any talk of plans to change them can rattle lenders, real estate agents and just about everyone else involved in the housing industry.

To put Fannie and Freddie’s roughly $5 trillion in mortgages in perspective, “the entire deposit base of banks insured by the FDIC — which is basically all the banks in America — is $13 trillion,” according to Don Layton, former chief executive of Freddie Mac and senior industry fellow at the Harvard Joint Center for Housing Studies. Many experts believe that shifting trillions of dollars in home loans onto the balance sheets of private banks could potentially be very disruptive to the industry, even putting the fixed-rate mortgage in jeopardy — but no one can really say for sure. “These sizes are so large, there’s no proof of what would happen. It would be a giant experiment.”

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“Fannie Mae and Freddie Mac are essential to the American mortgage system,” said Bernard Fulton, senior policy representative at the National Association of Realtors. “Before Fannie and Freddie, the homeownership rate was in the 40 percent range — now it’s nearly 70 percent across America. … They make it possible for consumers to get a mortgage anywhere in the country at a 30-year fixed rate, with a relatively low down payment.”

While we sometimes take it for granted, that particular loan product — the 30-year, fixed-rate mortgage, with no prepayment penalty and the ability to lock in an interest rate weeks before closing — is what makes Fannie and Freddie especially important to middle- and working-class homebuyers, according to Layton. “That is called, in certain circles, the ‘American mortgage,’ because it’s not available overseas,” he said.

In countries like Canada or England, for example, where there’s no government-backed entity able to absorb excess home loans and guarantee investors steady payments for decades, banks must keep those loans on their balance sheets and homebuyers have to accept that their mortgage rate will float every few years. That’s why Alex Jacobs, executive vice president and national retail sales manager for Wintrust Mortgage, hopes reformers will keep “the importance of homeownership within the United States” at the forefront of their minds. “It’s still one of our best ways for wealth creation for Americans,” he said. “They have to be very deliberate and thoughtful.”

“By packaging mortgages into mortgage-backed securities and guaranteeing the timely payment of principal and interest on the underlying mortgages to the investors, Fannie Mae and Freddie Mac attract to the secondary mortgage market investors who might not otherwise invest in mortgages, thereby expanding the pool of funds available for housing,” said Howard Ackerman, vice president for Northern Illinois at Regions Mortgage. “That makes the secondary mortgage market more liquid and helps lower the interest rates paid by homeowners.”

The reforms could impact different sectors of the real estate market in different ways. While real estate brokers generally benefit from looser credit, agents who specialize in luxury properties wouldn’t be as directly impacted by housing finance reform, since Fannie Mae and Freddie Mac don’t purchase jumbo loans. But some reform proposals do touch on the jumbo market and borrowing costs could rise across the board if the GSEs were scaled back and banks were forced to take on more home loans.

Plans for moving ahead

While many are cautious about reform, U.S. officials are also understandably uneasy about leaving taxpayers on the hook in the event of another mortgage meltdown. So lawmakers have been debating for years how best to protect taxpayers while preserving credit availability.

“There’s often talk about ‘shrinking the footprint’ of the GSEs, which by definition would impact real estate agents and borrowers if it was done more than just at the edges,” Layton said. And such efforts seemed to gain momentum in 2019. FHFA Director Mark Calabria said he’s focused on doing whatever is needed to get Fannie Mae and Freddie Mac out of government conservatorship, and already tightened lending requirements on some low-down-payment loans. The Treasury Department, meanwhile, issued its own recommendations in September, which call for increased competition and allowing the two GSEs to raise more capital. While the Treasury plan was short on specifics, it suggested that the Trump administration could try to move forward with incremental reforms if Congress doesn’t act.

Jacobs likes to look at these reforms in the context of others that have come to the mortgage sector in recent years, such as TRID and the new good-faith estimate forms. “There’s a level of fear with any change,” he said. “I may be overly optimistic, but when you look at a number of the changes that we’ve had over the years, once we get to the new normal, the industry is very good at absorbing these changes and putting them into a format that’s easy for our clients to work with.”

However, because the GSEs are inherently politicized, it can be more useful to look at what’s actually being done, rather than what’s being said. So far, the Treasury and FHFA seem to appreciate the enormity of the ship they’re steering and appear to be approaching reform with caution.

That’s partly because Fannie and Freddie are now perceived as better managed than before the housing crisis. Layton said key reforms — from eliminating hidden subsidies to transferring most of the credit risk to investors — have already strengthened the companies.

Fulton said the FHFA has done a “remarkable” job overseeing the GSEs and following regulations established by Congress. “You have to have safe, responsible mortgage products, and you have to have verified, credit-worthy borrowers,” Fulton said. “And those two things mean that what goes out in terms of mortgage-backed securities to investors is high quality, and the investors are responding. I think that’s why we have such low interest rates, and that’s a good thing.”

As Fannie and Freddie grew stronger and the housing industry rebounded, the idea of winding down the GSEs started to grow less appealing — especially to small lenders, which in 2017 urged Congress to continue providing a federal backstop to Fannie and Freddie and to preserve and recapitalize them under a public utility model.

NAR also supports a utility-based approach. “Our proposal is to have the federal government back these institutions, but regulate them to make sure they keep the mission, as opposed to just going after shareholder profit, which is what happened last time in a really toxic environment,” Fulton said.

Why Congress isn’t the only avenue for action

While it’s unclear if the FHFA will take more steps this year to steer Fannie and Freddie out of conservatorship, most experts don’t foresee Congress taking up the issue in an election year — if at all. “Right now, they’re wildly popular, and mortgage rates are as low as ever, and I think that’s a credit to what’s going on [at the FHFA],” Fulton said. “And I think that success takes a lot of pressure off of Congress to act on Fannie and Freddie.”

In the absence of congressional action, the notion of administrative reform has started to gain more traction. “Everyone had, until recently, assumed that to get out of conservatorship, you’d have to do legislation,” Layton said. Administrative reforms would likely revolve around amendments to the Senior Preferred Stock Purchase Agreements, which dictate the terms of the government’s support for Fannie and Freddie. Layton said that could more or less line up with what small lenders would like: codifying the successful reforms of recent years and allowing the GSEs to build capital, but otherwise largely letting them be.

Ackerman is optimistic that housing finance reform could help stabilize the housing market over the long term, if the FHFA can strike “the right balance between taxpayer protection, investor returns and consumer costs.” The Mortgage Bankers Association, of which Ackerman is a member, wants to see Fannie and Freddie exit government conservatorship — as long as the reforms meet certain criteria, such as preserving the 30-year fixed rate mortgage, minimizing the risk of market disruptions, and maintaining a competitive landscape for lenders of all sizes.

Layton said using administrative reforms to incrementally move the two GSEs toward a regulated utility structure would probably provide the best implementable outcome for everybody. “It’s low-risk, we know how it all works, and the weaknesses and hidden subsidies of the past have been eliminated and contained,” Layton said. “Instead of starting off with major new legislation, with a whole new set of likely loopholes and unintended consequences, it’s just pragmatic to close the ones in the system we already know — it’s likely to work better.”

In terms of near-term impacts on Realtors, Fulton doesn’t expect to see much in the way of wholesale changes to Fannie and Freddie in the coming year, even if President Donald Trump pushes forward with administrative reforms. “We’ll hear a lot of discussion and thought about what should come next, but not a whole lot of movement toward that,” Fulton predicted. “I think there’s only so much Fannie and Freddie can do administratively to achieve their vision. They’ll probably push the envelope, but there’s still only so much they can do.”

In the meantime, Fulton said there’s not a whole lot that real estate agents can do to prepare themselves or their clients — except to pay attention to the debate and where their elected officials stand on it. “If I were a Realtor, I’d definitely tell my members of Congress to contact FHFA and tell them how their first priority should be to make responsible mortgages widely available.”

Jacobs agreed that staying informed and acting as a steadying figure for clients is the best course of action for real estate professionals. “They’d want to bring a level of patience and calming to their clients because there’s so much unknown,” he said. “They need to make sure they’re just staying informed through their organizations, through their lending partners, with their trade associations. It’s important that they’re keeping a pulse on it.”