A proposed deregulation of the home loan market that Donald Trump is widely expected to pursue could have massive consequences for new homebuyers — particularly those with low incomes, reported CNN on Monday.
Specifically, Trump is likely to try to privatize Fannie Mae and Freddie Mac, the mortgage-backing giants that the federal government took a stake in following the 2008 financial crisis. He attempted to do this in his last term, but was unsuccessful.
Fannie and Freddie's function is to repackage existing mortgages to investors in order to ensure stable cash flow and allow loans to be issued affordably to people with lower incomes. They were brought under government conservatorship in order to stabilize the housing market during a period when the market had severely misjudged the risk of subprime loans.
The federal government's stake in these programs is worth billions of dollars, so re-privatizing them would be an immediate windfall — but it would also introduce significant new complexities into the mortgage market and, according to some economists, would result in homebuyers paying a lot more.
If the spinoff is not handled carefully, it could also scare off bondholders into seeing mortgages as riskier investments, driving up the price of 30-year fixed home loans for everyone.
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Mark Zandi, who heads up economic analysis at Moody's, "estimated that full privatization of Fannie and Freddie would cost the typical American taking out a new mortgage $1,200 annually." However, home prices and interest rates were lower back then — adjusted for today, it would be "between $1,800 and $2,800 per year for a typical mortgage holder, Zandi told CNN after updating his original paper’s calculations" — with the heaviest cost falling on people with lower incomes and credit scores.
Republicans have sought to privatize Fannie and Freddie for years, noting that the federal conservatorship was never intended to be permanent. They have also blamed these institutions, and their mandate of making home loans more accessible to lower-income people, for causing the 2008 financial crisis in the first place. This is not true, as Fannie and Freddie's share of the highest-risk category of mortgages actually decreased during the housing bubble.
Trump's re-election already injected new uncertainty into mortgage markets with, rates seeing a sharp uptick to 6.8 percent.
