How much competition would Fannie Mae really face?

fannie mae mortgage ratesImage source: Fannie Mae

One of the concerns some have raised about Fannie Mae and Freddie Mac is competition. There’s been talk about creating competitors for the government-sponsored enterprises when they exit conservatorship, but that will be more easily said than done.

Get The Full Warren Buffett Series in PDF

Get the entire 10-part series on Warren Buffett in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q4 2019 hedge fund letters, conferences and more

Tim Pagliara and Grant Stark of CapWealth Advisors told ValueWalk in an interview that the concept of creating competition for the GSEs sounds good in theory, but it simply isn't practical.

How Fannie Mae and Freddie Mac are like utility companies

Stark looks at the GSEs as utility companies operating as key infrastructure in the mortgage industry.

"They're in the background," he explained. "They're in all of our lives, but you don't see them and they're essential to the GDP and the U.S. economy. And that's why the GSE works. It's a consistent stream of earnings that comes with an appropriate level of capital."

He added that the banking system and all the "financial plumbing" has been changed a lot since 2008. Many safeguards have been implemented due to lessons learned during the financial crisis. The GSEs will now stick to what they do best, which is "vanilla mortgages," including processing them and ensuring that banks have liquidity.

"It's very difficult to replicate, if not impossible," he said.

Why the GSEs are needed

One thing that makes Fannie and Freddie unique is the way they make mortgages available for people in all parts of the country. Thus, a mortgage market without them would have serious problems, especially in certain parts of the country.

"One of the things Fannie Mae and Freddie Mac do is when they package mortgages and sell them to investors," Pagliara explained. "It's an agnostic process, so they package mortgages from Oregon, Detroit, New Orleans, Nashville, Tennessee, they're all packaged together. That's one of the critical parts. They make mortgages affordable for everyone.

He added that the GSEs make a big difference in the mortgage market because they spread the risk for investors nationwide into different pools of mortgages. Picking up on the concept of Fannie and Freddie as a utility company again, he recalled the breakup of AT&T. The company was broken up but then recombined in the private sector.

"If you create too many competitors in the mortgage market, you're going to end up with regionalization in pricing, in availability of mortgages," he said. That isn't the kind of outcome they're looking for."

Competition will be difficult for Fannie Mae and Freddie Mac

Pagliara also said it will be difficult for other companies to get into the market and do what the GSEs do. He also said companies simply won't want to enter competition with Fannie Mae and Freddie Mac.

"They may create some competition, but at the end of the day when they finally look at this, it makes it really difficult to stay competitive," he told ValueWalk.

He said there's actually a lot of competition already in the market, but Fannie and Freddie serve a very specific section of the mortgage market. He said the limit for mortgages with the GSEs is in the $450,000 range. And he added that there's simply not a lot of competition for that business to begin with because firms don't want the interest risk that goes with a 30-year mortgage.

"They're serving blue collar, middle class, lower-middle class America," he said. "The idea that you'd have a lot of competition is almost counterintuitive. In the same way as a utility company, efficiency comes from the way they can issue mortgages to investors."

Competition for Fannie Mae: concept versus reality

Stark emphasized that firms especially don't want the interest rate risk associated with 30-year mortgages right now because rates are at 0%.

"Who would be one to step up and take the risk?" Stark said. "If banks are taking on a 30- year mortgage, why would they want to keep this mortgage when interest rates have moved up?

He emphasized that no other companies have the scale that Fannie Mae and Freddie Mac have in order to handle such 30-year mortgages.

For exclusive info on hedge funds and the latest news from value investing world at only a few dollars a month check out ValueWalk Premium right here.

Multiple people interested? Check out our new corporate plan right here (We are currently offering a major discount)



About the Author

Michelle Jones
Michelle Jones was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Michelle has been with ValueWalk since 2012 and is now our editor-in-chief. Email her at Mjones@valuewalk.com.

Be the first to comment on "How much competition would Fannie Mae really face?"

Leave a comment

Your email address will not be published.