The Trump administration released on Thursday its long-awaited plan to recapitalize Fannie Mae and Freddie Mac, the government-backed mortgage giants responsible for a large portion of the $5 trillion home mortgage industry, with a potentially profound impact for millions of future home buyers.
After spending $187 billion to bail out Fannie Mae and Freddie Mac during the 2008 financial crisis, the government is now seeking to reduce its role in the two entities, which were taken over at taxpayer expense to mitigate a housing market crash after excessive risk-taking during the sub-prime mortgage crisis.
But returning Fannie and Freddie to private ownership could have a negative effect on home buyers, especially first-time, lower-income, minority, and rural borrowers, said Adam Levitin, a professor at Georgetown University Law Center who studies bankruptcy and consumer finance.
"The Administration’s proposal will increase the cost of mortgages for all borrowers, especially families of color, low- to moderate-income families, and rural families whose income growth has been surpassed by housing costs for homes as well as rental markets across the country," a civil rights coalition said in a joint statement Thursday.
While Fannie and Freddie don’t offer loans themselves, they buy them from banks and lenders. Without the government backing that Fannie and Freddie provide, financial institutions may be less likely to extend credit to home buyers over a longer term, fearing default. That means the popular 30-year fixed rate mortgage may become unattainable for certain home buyers, with mortgage lenders preferring short-term fixed rate or adjustable mortgages, said Levitin.
The Treasury Department plan submitted to the White House said it favors preserving the 30-year fixed rate mortgage, noting in its 53-page statement of principles that it would allow financial institutions to keep more of the earnings, foster competition and provide taxpayer protections.
“The Trump Administration is committed to promoting much needed reforms to the housing finance system that will protect taxpayers and help Americans who want to buy a home,” said Treasury Secretary Steven Mnuchin in a press release.
The Treasury plan says it is "possible" that 30-year fixed-rate mortgage loans could remain widespread and at similar prices without government support. To bolster its argument, the White House points to the private jumbo loan market, the Danish system of "covered bonds," and models from other countries.
However, as Levitin testified before Congress in 2013, these arguments leave out a few key details. The jumbo loan market is much smaller than the conventional market and indirectly benefits from the government market. For instance, jumbo portfolio lenders hedge their bets by investing in securities backed by Fannie and Freddie.
In addition, the Danish system has an implicit and explicit government guarantee of mortgages, said Levitin, with a guarantee of all deposits and senior debts issued by its banks.
As far as comparing the U.S. model to that of other nations, the 30-year fixed rate mortgage isn't widely available in other countries.
“It does concern me,” said Jeff Monheit, a home buyer looking for a four-bedroom house in New Rochelle, New York. He and his wife are seeking a fixed-rate 30-year mortgage, have no debt other than student loans, and have saved up a nest egg.
Yet even they might not be candidates for the standard 30-year loan, if Fannie Mae and Freddie Mac were to be recapitalized.
“We would do a 15-year mortgage and get a deal. ARM products aren’t for us. At least not with these [low] rates,” Monheit told NBC News.
While there is little push from lawmakers to take the issue up before the 2020 elections, Wall Street is salivating at the prospect of a $100 billion IPO. After the 2008 government bailout, investors in Fannie and Freddie stopped receiving dividends — since payments were redirected by the government to the Treasury Department, in order to pay back taxpayers.
The nation’s largest bank, JPMorgan Chase, even held a panel in June with investors and legal and finance experts to discuss how recapitalization of Fannie and Freddie would affect the market, spokesman Brian Marchiony told NBC News.