Republicans are raising the prospect of making the biggest change to home loans since the New Deal.
Two of President-elect Donald Trump’s cabinet picks, along with Republican lawmakers, have been speaking publicly about curbing government backing for the kind of loan that the majority of Americans rely on to buy a house: the 30-year fixed-rate mortgage. Supporters of the change say removing U.S. backing could protect taxpayers from being on the hook for billions of dollars in the event of a market collapse — as they were after the financial crisis of 2008.
But some in the housing industry say that without the government’s support, 30-year mortgages may become scarce, leaving home ownership out of reach for many Americans.
“Eliminating the government guarantee would likely lead to higher rates, making credit more expensive, or take the 30-year fixed-rate option off the table altogether,” said William Brown, president of the National Association of Realtors.
Making changes to the housing market carries political risk. If home buyers can’t obtain affordable mortgages, they may turn against Republicans responsible for the change. About 71 percent of home purchases and refinances in October used a 30-year fixed-rate mortgage, according to the Urban Institute, a Washington-based research group.
Ben Carson, Trump’s nominee to be secretary of the Department of Housing and Urban Development, told senators Thursday that the 30-year mortgage could survive without a government guarantee. He said the private market could take on much of the responsibility.
“You can’t do it overnight. It has to be a gradual change,” Carson said at his confirmation hearing. “We can’t do it in a haphazard way, and we can’t do it in an ideological way.”
Trump hasn’t detailed any formal policy on mortgages, and Carson’s comments came only after being asked about the topic. Transition spokeswoman DJ Nordquist said in an e-mail after the hearing that Carson “believes strongly” in the need for a 30-year mortgage option.
Until recently, such debates have been mostly academic. While the Republican-controlled House Financial Services Committee has passed legislation that would constrict the government’s role in the market, such plans never had much of a chance getting past the Senate or President Barack Obama.
Now, with Republicans controlling the legislative and executive branches, curtailing the government-mortgage guarantee is becoming more than an ideological pipe dream.
Fannie Mae and Freddie Mac, created by the government and spun off as shareholder-owned corporations, for years have been the foundation of the housing market and have backed the 30-year mortgage. They purchase mortgages and package them into bonds, absorbing much of the risk, making it easier for homebuyers to obtain loans and freeing up money for banks to make more loans. When the housing market melted down in 2008, the government spent $187.5 billion bailing out Fannie and Freddie. Since then, they’ve become profitable again and sent the government more than $250 billion in dividends.
Steven Mnuchin, the president-elect’s pick for Treasury secretary, said Fannie and Freddie should “absolutely” be privatized, in an interview with Fox Business Network on Nov. 30. Mnuchin may be asked to clarify those remarks at his confirmation hearing on Thursday.
Some mortgage investors and others in the housing industry are expecting an overhaul.
“I don’t know anyone who’s not at least paying lip service to the idea that having a market dominated by the government is not a good idea,” said Lewis Ranieri, who runs an investment-management firm and helped invent the mortgage-backed security.
Before the Great Depression, most Americans had short-term mortgages with a balloon payment due at the end of the loan. Banks pulled back on mortgage lending during the Depression, which worsened the economic crisis.
Since then, the government has had a large role in backing mortgages. As part of the New Deal, President Franklin Roosevelt and lawmakers created the Federal Housing Administration, which insures lenders against default. That eventually led to the creation of the 30-year mortgage backed by the government. In subsequent decades, lawmakers created Fannie Mae and Freddie Mac, which make similar guarantees and carried implied government backing.
During the housing boom in the 2000s, the private market was often willing to make mortgages on more generous terms than Fannie, Freddie or the FHA. In 2005 and 2006, the private market took on well over half of mortgages without any sort of government backstop, according to the Urban Institute Housing Finance Policy Center.
The private market’s role dropped sharply in the crisis. Now the government backs about two-thirds of the market, with the remaining one-third mostly composed of large mortgages to safe borrowers that banks are willing to keep on their balance sheets.
Getting the private market to take on more mortgage credit risk is a goal of many Republicans, even if it comes with higher mortgage rates, lower home ownership or even the death of the 30-year mortgage.
“I don’t remember seeing the 30-year, fixed-rate mortgage and the right to own a home in the Constitution,” said Anthony Sanders, a finance professor at George Mason University who has testified before Congress on housing-finance reform.
The financial services committee, led by Texas Republican Jeb Hensarling, in 2013 passed a bill that would liquidate Fannie and Freddie and reduce the number of loans eligible for FHA backing. That has met opposition from housing industry groups that think it would shut millions of borrowers out of the mortgage market and cause a new housing crisis.
Among the problems with curtailing the guarantee, supporters say, is the impact such a move would have on less-well-off borrowers who benefit the most from the subsidies. Fannie, Freddie and the FHA in effect subsidize the costs of riskier borrowers with fees from borrowers unlikely to default, said Sarah Wolff, senior researcher at the left-leaning Center for Responsible Lending.
It is also unclear how much appetite the private market has to take on mortgage credit risk and at what price. Issuance of private-label mortgage-backed securities has been moribund since the crisis. Some lenders say that’s because private investors can’t compete with the prices the government charges, while others point to ongoing structural issues in the private market.
Fannie and Freddie are already starting to pass off some of their own mortgage-credit risk to private investors. Since 2013, the companies have sold bonds that let investors take on some of the default risk.
Even those securities are controversial. Fannie and Freddie aren’t getting good enough prices from investors to warrant the sales and are effectively siphoning profits to investors, said Ann Schnare, an independent financial consultant and former executive at Freddie.
Still, Ranieri said such sales might give a smoother route to bringing more private money back into the market than more extreme proposals. “When you try and wean someone off drugs, you can’t go cold turkey,” Ranieri said.