The Pandemic Makes Fannie and Freddie Even More Indispensable

(Bloomberg Businessweek) -- The pandemic has pulled Uncle Sam deeper into the housing market again. This time he may become too deeply embedded to ever leave.

With the economy shut down, unemployment soaring, and no clear end in sight, policymakers have been leaning on two mortgage companies the government took control of during the last housing crisis, Fannie Mae and Freddie Mac. The companies buy and guarantee home loans and then package them to be sold in the bond market. And now they’re at the heart of the government’s efforts to rescue homebuyers, mortgage lenders and servicers, and some landlords.

Even critics of government’s involvement in housing have undergone a bit of a conversion. “The private market can’t save us,” says Anthony Sanders, a finance professor at George Mason University who describes himself as a libertarian. He was a steadfast advocate for paring down Fannie and Freddie. “The tides have changed dramatically. Now we realize without Fannie and Freddie, we’d be in a world of hurt, because who else is going to buy these mortgages?”

The Trump administration had been moving on a plan to privatize the two companies. Then the virus hit and the market for private-label mortgage bonds—those not backed by Fannie and Freddie—froze, with some of the firms that issue them putting a halt on new loans.

Government control of the mortgage giants gave policymakers and Congress a tool to provide economic relief quickly. Borrowers can delay mortgage payments for as long as a year if they have a government-backed loan. Renters are temporarily protected from eviction if their landlords have federally backed loans.  

Delinquencies on U.S. home loans surged by 1.6 million in April, the biggest one-month gain ever, according to data compiled by Black Knight Inc. The majority of those were in government forbearance programs allowing borrowers an initial six-month payment deferral without penalty.                  

“The fact that 70% of the market is federally backed has made this experience far less gruesome than it could have been,” says Julia Gordon, president of the National Community Stabilization Trust. “As imperfect as it is, we’re still in a better place than we were in 2007.”

Unlike many private companies, Fannie and Freddie have continued to buy mortgages as usual, and investors have continued to buy their bonds, which are viewed as backed by the U.S. government. That, in a nutshell, is the case for keeping Fannie and Freddie around: The government’s ability to shoulder mortgage risk keeps housing open to more buyers, especially after a crisis when lenders run away from risk. “The fact is that the only part of the mortgage market working well right now is backed by the government,” says Jim Parrott, a former Obama administration housing adviser who now consults for lenders and other mortgage companies.

While Trump officials say they’re still working on their plan to reduce the government’s role in mortgages, that’s probably been pushed off for months, if not years. Advocates of a bigger private mortgage market note that the Fed gave an extra boost to government-backed mortgages by buying tens of billions of dollars in Fannie and Freddie bonds. “You could look at it and say that it’s only the government-backed sector that has held up,” says Ed DeMarco, a former acting director of Fannie and Freddie’s regulator who now heads the Housing Policy Council, a trade group for large banks and other lenders. “But I would suggest that it’s the government-backed sector that’s getting the most support.”

The government is likely to move next to the rental market, which could soon be swamped by evictions. The residential real estate industry is lobbying for $100 billion to help make up the shortfall in rents. But the U.S. will have to consider longer-term help, from funding more affordable home construction to putting more money into rental vouchers as the population of the newly poor expands, says Mark Zandi, chief economist at Moody’s Analytics.

Sanders might even get behind those ideas, too—as long as they’re temporary. “I’m still a libertarian,” he says. “Unfortunately, temporary programs have a strange habit of becoming permanent policy.”
 
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