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Newly appointed Treasury Secretary discusses privatization of Freddie Mac, Fannie Mae

The appointment of Steve Mnuchin has many people in the mortgage industry talking.
12/1/2016 9:32:34 AM

Since the election, President-elect Donald Trump has been busy creating his presidential cabinet. His latest announcement — the appointment of Steve Mnuchin, previously an executive at Goldman Sachs and chairman of OneWest Bank, to Treasury Secretary — has many people in the mortgage industry talking.

Mnuchin's plan for Freddie and Fannie

In an interview with Fox Business, Mnuchin stated he and Trump plan to restructure and privatize conventional mortgage giants Freddie Mac and Fannie Mae.

Freddie and Fannie have been under government control since 2008 when they were granted a bailout of $188 billion. They both paid off their bailouts several years ago and have been not only profitable, but widely successful, ever since, Forbes reported. However, the two government-sponsored enterprises haven't seen much of that money; instead, it's been redirected to the U.S. Treasury.

Actually, the GSEs each have about $600 million, even though $5 trillion worth of loans are recorded in their books currently, The New York Times reported. Times reporter Gina Chon pointed out that this could spell eventual disaster for the two companies, should another housing crisis emerge.

Mnuchin asserts that keeping Freddie and Fannie under the government's control is dangerous.

"In many cases, this displaces private lending in the mortgage markets, and we need these entities that will be safe," he said in an interview with Fox Business's Maria Bartiromo. "So let me just be clear; we'll make sure that when they're restructured, they'll be safer and they don't get taken over again."

Mnuchin also noted that the move is in his list of top 10 things he plans to address as soon as possible.

What buyers and market professionals think

A move this big is sure to shake things up in the world of mortgages. Over the past few years, the Obama administration has brought up the subject of returning Freddie and Fannie to their previous private status, but not much has come from talks. The last major effort was in 2014, but wasn't successful in getting as far as the Senate, according to the Chicago Tribune.

Some people have been pushing loudly for a change in Freddie and Fannie's statuses — a few even bringing the issue to courts. Hedge fund manager Bill Ackman of Pershing Square and Bruce Berkowitz of Fairholme Funds, who both hold shares in the companies, have both sued the government in hopes of freeing Freddie and Fannie from conservatorship.

"Freddie Mac and Fannie Mae have played major roles in making residential mortgages affordable."

However, there are plenty of opponents to the notion of privatizing Fannie and Freddie. They have both played major roles in making residential mortgages affordable for American homebuyers. They don't give out loans themselves; rather, they buy loans from lenders and package them into attractive securities for investors. The Tribune noted that this is a primary reason why 30-year mortgage rates have been so low since the housing crisis.

Even proponents of relieving Fannie and Freddie from government control have rarely suggested an outright privatization of the companies. Representative Jeb Hensarling, who had been rumored to be in the running for Treasury Secretary, has talked much about the benefits of winding Fannie and Freddie down. However, when discussing this plan in recent days, he spoke of a gradual elimination that would take place over the course of five years, The Tribune reported.

It's not clear how much success Mnuchin will have with his plan to completely privatize the companies over the next year.  After all, it "all depends on what one means by 'privatized'," noted Mark Calabria, director of financial regulation studies at the libertarian Cato Institute, according to The Tribune.

With the future of Freddie and Fannie currently unclear, prospective homeowners might be concerned about how it will affect mortgage rates. If Freddie and Fannie do become privatized, there is a chance rates would increase. If this turns out to the be the case, the best time to nail down a mortgage is now, while they still remain at relatively low levels.

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