Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) will increase the rates they charge to guarantee home loans to make their services less competitive and decrease their presence in the secondary mortgage market, reports Clea Benson for Bloomberg.
The Federal Housing Finance Agency, which is regulating the two agencies, announced that they will first raise rates in New York, New Jersey, Connecticut and Florida because their costs are also higher in those places, but more fee hikes can be expected down the line. “The new pricing continues the gradual progression toward more market-based prices, closer to the pricing one might expect to see if mortgage credit risk was borne solely by private capital,” said FHFA Acting Director Edward J. DeMarco.
Washington getting out of the secondary mortgage market
DeMarco is on his way out and the Senate will vote on Democratic congressman Mel Watt’s nomination tomorrow. Watt could reverse the fee increase if his nomination is approved, but the fee increase makes sense in light of Washington’s overall plan for the two companies, so a reversal seems unlikely. Getting out of the secondary mortgage market is one of the few points of political agreement in Washington, with Republicans and Democrats differing only on the details of how to close them down. The current plan is to wind the two companies down between now and 2018, although alternative bills are on the table.
Investors betting against political winds
Some investors have floated the idea of investing in Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) either to force the US government to pay them some form of compensation (the current law sends all dividends to the federal government) or take the companies private and continue operating them. The first plan hasn’t made much headway in the courts, and the second has been dismissed by President Obama, who doesn’t want to risk creating two more private financial institutions that might be “too big to fail.”
Investors putting money into Fannie Mae and Freddie Mac
Despite the fairly clear political trajectory, financial analysts have argued that if loan guarantees are set at market rates, home mortgages will be out of reach of many ordinary Americans, and that the federal government will have to change course. Even if those financial predictions are correct, investors putting money into Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) have to make the risky bet that politicians will reach the same conclusion.