Mortgage Update - January 6th, 2025
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Read time: ~4 minutes
The End of Government Control for Fannie Mae and Freddie Mac is Near!
Britney Spears, Fannie Mae, and Freddie Mac—what do they all have in common?
All three found themselves on the brink of collapse and were forced into conservatorship handcuffs in late 2008. Thirteen years later in 2021, Britney pulled off her epic escape (#FreeBritney), shaking off her father’s toxic control. If I were a betting man, my money would have been on Fannie and Freddie breaking free of government conservatorship long before Britney’s big moment. But now, it seems freedom may finally be within reach for the mortgage giants!
Shares of Fannie Mae and Freddie Mac soared nearly 30% on Friday (+73% on the week) after news broke about proposed steps toward releasing them from government control. While efforts to privatize these giants under Trump’s first term were delayed by the pandemic, it appears privatization is now a key priority for Trump’s second term.
Fannie and Freddie back all conventional loans, though they don’t actually originate mortgages themselves. Instead, they purchase loans from lenders, bundle them into securities, and guarantee them against default, ensuring liquidity for new loans. The government’s backing of the mortgage market has helped stabilize the market and made the 30-year fixed-rate home loan a staple in the U.S. even though it is a rarity in other countries.
So, what will releasing Fannie and Freddie to the free world mean for mortgage rates and the housing market? The impact depends largely on the structure of the transition, the level of government guarantees, and the market conditions during the shift. Here are a few potential scenarios:
Slight Increase in Rates: If government guarantees are reduced, but not entirely removed, rates could rise modestly due to the added risk for banks and investors without the full government backing of loans.
Significant Rate Increases: If Fannie Mae and Freddie Mac become fully privatized with no government guarantees, rates could rise substantially, especially for higher-risk borrowers.
Minimal Impact: If a solid public-private partnership emerges with enough investor confidence, the impact on rates could be minimal. This would be the ideal path.
Key Takeaway: It’s clear that the Trump administration may have plans to release Fannie Mae and Freddie Mac from government control. The effect on the mortgage and housing markets will depend on how the transition unfolds. Ideally, a shift to the private market with limited government backing would minimize disruption.
Goodbye, FHA Mortgage Insurance? 🙏
We all know the main downside with FHA financing is the PMI, which stays on the loan for the life of the loan. This has often led borrowers to shy away from FHA loans when other options are available. But that could change if the "Mortgage Insurance Freedom Act" becomes law!
Recently introduced in the U.S. House of Representatives by Reps. Gregory W. Meeks (D-N.Y.) and Pete Sessions (R-Texas), this bill proposes to end lifetime mortgage insurance premiums for FHA borrowers. Instead, it would allow borrowers to drop PMI once their loan-to-value (LTV) ratio hits 78%, aligning FHA policies with conventional loans backed by Fannie Mae and Freddie Mac.
The lifetime requirement of PMI on an FHA loan has never made sense to me. Mortgage Insurance exists as a protection against default on low equity loans. However, you have homeowners that are currently in FHA loans with a 50% loan to value that are still paying monthly PMI. These loans pose absolutely no risk to FHA or the mortgage companies servicing the loan.
This could be HUGE for the housing market, especially in today's landscape of rising mortgage rates, homes prices, property taxes, and insurance. FHA borrowers, particularly first-time buyers—who account for 82% of FHA purchases—stand to benefit most. Let's all say a collective prayer that this bill gets the support that it deserves!
Key Takeaway: A bipartisan bill has been introduced in the House of Representatives to eliminate PMI for FHA borrowers once they reach 78% loan-to-value. This change could significantly benefit homebuyers, as FHA loans typically offer lower interest rates and more flexible qualification requirements. Stay tuned—we’ll keep you updated as the bill progresses!
Big Week Ahead!
All eyes are on the upcoming December Jobs Report, set to be released this Friday. Mortgage rates have remained stubbornly high, driven by a string of strong economic data. This report is significant as it will shed light on whether the labor market is still running hot or beginning to show signs of weakening.
Remember, a cooling job market is essential for the Fed to gain confidence in lowering rates in the near future. If the labor market continues to show strength, we can expect the market to anticipate higher rates for longer.