The privatization of Fannie Mae and Freddie Mac, government-sponsored enterprises (GSEs) that currently back most U.S. mortgages, could have significant implications for homebuyers.
While increased competition and innovation could benefit some borrowers, higher mortgage rates and reduced access to credit could make homeownership less affordable and accessible for many. Policymakers will need to carefully consider these potential impacts as they debate the future of the GSEs.
Many assert benefits that include increased competition, more product innovation and reduced risk to taxpayers. While potential risks include higher mortgage rates not government secured, increased market volatility leading to periods of tight credit and higher rates and a disproportionate impact on low to moderate income and minority segments.
Key Considerations:
Capital Requirements: Private companies would need to hold sufficient capital to absorb potential losses, which could impact their willingness to lend and the rates they offer.
Regulatory Oversight: A privatized mortgage market would still require strong regulatory oversight to protect consumers and ensure market stability.
Affordable Housing Goals: The GSEs are currently required to meet certain affordable housing goals. It is unclear whether private companies would be subject to similar requirements.
The industry's ability to best serve low-to-moderate income, minority and first-time-homebuyer communities must be a priority. Affordability gaps continue to rise and homeownership rates among many segments are the lowest ever; this impedes on their ability to create wealth.
Privatization of the GSEs could disproportionately impact low- to moderate-income borrowers by potentially reducing their access to affordable mortgage credit.
Higher Mortgage Rates: Private companies, driven by profit motives, might increase mortgage rates compared to the GSEs. This would make homeownership more expensive for low- to moderate-income borrowers, who are often more price-sensitive.
Stricter Underwriting Standards: Private lenders may implement stricter credit requirements and down payment standards than the GSEs. This could exclude many low- to moderate-income borrowers from qualifying for a mortgage.
Reduced Focus on Affordable Housing: The GSEs are mandated to support affordable housing goals. Privatization could lead to a shift away from these goals, as private companies prioritize profitability over social responsibility.
Limited Access to Underserved Markets: Private companies may be less inclined to serve borrowers in rural or underserved areas due to perceived higher risks and lower profit margins. This could leave low- to moderate-income borrowers in these areas with fewer options for obtaining a mortgage.
Overall, the privatization of Fannie Mae and Freddie Mac raises concerns about the potential for a less inclusive mortgage market, where low- to moderate-income borrowers face greater challenges in achieving homeownership.
Author
Larry L. Gilmore
President & CEO
ClearBlu Group
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