WASHINGTON — The Congressional Budget Office has found that restructuring the mortgage market would save the government tens of billions of dollars, but could also increase the cost of housing, presenting yet another hurdle for lawmakers looking to reform the mortgage giants Fannie Mae and Freddie Mac.
The CBO estimated in a
The office projected that if Fannie and Freddie were eliminated, the government would save $18.1 billion compared to the current system, while a “guarantor as a last resort” system would result in $11.7 billion in savings and a hybrid public-private structure would result in $12.8 billion in savings. Each of these plans would decrease taxpayers’ exposure to credit risk, according to the report.
The assessment is an update to a study the CBO conducted in 2014.
But these alternative scenarios could also spur slightly higher mortgage rates and lower home prices, the report found.
In the event of a crisis, borrowers would see even sharper increases in interest rates and would have fewer mortgage options. In a mostly private secondary market, this would lead to significant declines in home prices.
“If the secondary market were largely privatized, there would be no explicit federal guarantees on most residential mortgages,” the report says. “But some type of government intervention might be necessary to stabilize mortgage markets during a financial crisis.”
Policymakers have expressed concern over how GSE reform would affect borrowing costs, and the issue “has been the biggest obstacle to GSE legislation,” wrote Jaret Seiberg, an analyst with Cowen Washington Research Group, in a research note on Friday.
“This worry convinces lawmakers to maintain the status quo rather than be accused of raising prices on voters,” he wrote. “Critics of reform will point to this CBO conclusion as a way to knock down any effort to revamp the housing finance system as they will ask lawmakers why they are making it more costly for borrowers to buy a home.”
The CBO examined four alternatives to lessen Fannie and Freddie’s influence in the market: a secondary market in which a single, fully federal agency would guarantee qualifying MBS; a hybrid public-private market in which the government and private guarantors would share credit risk; a secondary market where the government would act as a “guarantor of last resort” during a financial crisis; and a fully private secondary market where there would be no federal guarantees.
The government's credit risk would largely remain the same if policymakers opted for a system by which a single, fully federal agency backed qualifying mortgages. Mortgage interest rates could decline slightly under this approach and home prices might tick up modestly.
In the latter three scenarios, borrowers that would likely turn to GSE-backed mortgages under today’s system might be more inclined to take out mortgages with the Federal Housing Administration rather than a private mortgage company, the CBO predicted.
“FHA-backed mortgages might be more appealing to them than privately insured mortgages if FHA charged lower interest rates or if FHA’s credit standards were lower than those of private lenders and mortgage insurers, who might deny access to relatively risky borrowers,” the report said.
