The privatization of secondary mortgage markets will not happen realistically in the near future, according to a study conducted by Everett Stern, researcher and founder of intelligence firm Tactical Rabbit and the chief whistleblower of the HSBC money laundering scandal, on behalf of ValueWalk. The report is based on intelligence analysis and conversations with lobbyists and politicians in DC. Early in July, a group of lawmakers in the House of Representatives proposed to wind down or phase out the Federal Housing Finance Agency (FHFA) including the Federal National Mortgage Association/Fannie Mae (OTCBB:FNMA) and Federal Home Loan Mortgage Corp/ Freddie Mac (OTCBB:FMCC) within the next five years.
The lawmakers proposed the creation of a new Federal Mortgage Insurance Corporation (FMIC), to insure lower and middle-income homebuyers. However, the government’s exposure will be limited and the private sector as well as home buyers will be primarily responsible if the mortgages were defaulted.
Hedge Funds Lobbying For Privatization Of Mae & Mac
Hedge funds are also lobbying for the privatization of the mortgage giants such as John Paulson & Co.
In light of the proposed privatization of Federal National Mortgage Association/Fannie Mae (OTCBB:FNMA) and Federal Home Loan Mortgage Corp/ Freddie Mac (OTCBB:FMCC), lawmakers developed four legislations including:
- Housing Reform and Taxpayer Protection Act of 2013
- Mortgage Finance Act of 2013
- Housing Opportunity and Mortgage Equity Act of 2013
- Protecting American Taxpayers and Homeowners Act of 2013
In our report we evaluated different factors including the economic situation of the housing market, data, legislation, and the possibility of privatizing the secondary mortgage markets without causing severe harm and hindering the housing recovery.
- Housing Reform and Taxpayer Protection Act of 2013- a bill intended to provide secondary mortgage market reform. According to Stern, the bill has only 17% probability of getting passed the committee level, and only 4% chance of getting enacted.
- Mortgage Finance Act of 2013- a bill intended to revoke the charters for the Federal National Mortgage Corporation and the Federal Home Loan Mortgage Corporation upon resolution of their obligations to create a new Mortgage Finance Agency for the securitization of single family and mutifamily mortgages and other purposes. The probability to pass the committee is 1% and 0% to be approve for legislation.
- Housing Opportunity and Mortgage Equity Act of 2013-to prevent foreclosure of home mortgages and provide affordable refinancing of mortgages held by Fannie Mae & Freddie Mac. The bill has 7% chance to pass the committee level and 1% chance of enactment.
- Protecting American Taxpayers and Homeowners Act of 2013- to protect American taxpayers and homeowners by creating a sustainable housing system for the 21st century. This proposal has 21% chance of being enacted.
Freddie Mac, Fannie Mae PATH Strewn With Political Hurdles
According to our analysis, even if the proposed Protecting American Taxpayers and Homeowners Act of 2013 (PATH) has a higher chance of getting passed at the committee level, the bill is co-sponsored by Republican and a Democrat, which could “seriously hurt” its chances to make it to the floor of the Congress.
The government did not allow Federal National Mortgage Association/Fannie Mae (OTCBB:FNMA) and Federal Home Loan Mortgage Corp/ Freddie Mac (OTCBB:FMCC) to fail because of the following reasons:
- Financial institutions worldwide bore counter-party significant risk
- Capital markets depended on the value, hence the finance integrity of mortgage debt
- Secondary mortgage market liquidity and housing economy depended on Fannie Mae’s operations
In addition, PATH is gaining bipartisan support because it calls for the winding down of Fannie Mae and privatizing its main operations, which could lead to a reduction of interest rates for large banks. This would make Bank of America Corp (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM) even bigger, which could upset populist politicians.
Higher mortgage rates during economic hardship could make a 30-year fixed mortgage loan unaffordable. The legislation would increase the Federal Housing Administration’s minimum down payment from 3.5% to 5% for all non-first time borrowers. The overall secondary market would receive less governmental backing. If PATH becomes law, the Federal Housing Administration would account for one fifth of the mortgage market on average through the business cycle.
The several provisions of the PATH is supported by the American Bankers Association while Moody’s Analytics opined that it is a comprehensive bill, but not a viable proposal to privatize the mortgage market.
Stern concluded that the privatization of Federal National Mortgage Association/Fannie Mae (OTCBB:FNMA) and Federal Home Loan Mortgage Corp/ Freddie Mac (OTCBB:FMCC) or secondary mortgage market will not be achieved in the near future because the following reasons:
- The FMIC will charge premiums to private mortgage lenders in exchange for its guarantees; the cost of the premium will be absorbed by consumers
- PATH will not make it to the floor because of lobbying efforts, and
- It will not be enacted because of political divide, and the risk of hurting the recovery of housing market.