Freddie Mac's former CEO Don Layton predicts that higher GSE lending costs lie ahead, should the Trump administration’s plans for the agencies move forward.
That's in part because guarantee fees eventually became the main source of revenue for government-sponsored enterprises after they entered conservatorship in 2008 and underwent reforms aimed at reducing taxpayer risk.
And now reproposed capital requirements for Freddie Mac and Fannie Mae suggest the GSEs will need more revenue if they exit conservatorship.
"This will have a major impact on the cost of mortgage credit," said Layton, who is currently a senior industry fellow at the Harvard Joint Center for Housing Studies. "Guarantee fees, or revenue of the GSEs, will need to go up to be able to have a proper return on the shareholders' equity."
Mortgage industry groups recently asked Fannie and Freddie's conservator and regulator, the Federal Housing Finance Agency, to extend the time they have to comment on the latest GSE capital proposal, citing concerns about its potential impact on the cost and availability of mortgage financing. If fees increase, lenders would likely pass on the extra cost to consumers. Fannie Mae and Freddie Mac buy and guarantee securitized loans that represent a significant portion of mortgages originated in the United States, so their policies have an enormous impact.
Overall, Layton gave the FHFA's proposal a mixed review during a recent Harvard webinar.
He said if the FHFA's intention is to concentrate credit risk back into the GSEs the way it was prior to 2008, it "kind of works." He conceded that the proposal's higher capital requirements for Fannie and Freddie also make sense.
But Layton was critical of the costs involved in raising the capital relative to the benefits received from exiting conservatorship.
"I think there's materially increased systemic risk offset by capitalization in a very expensive way," he said.
Analysts are watching both Vice President Kamala Harris and former President Donald Trump for potential regulatory picks, as well as how strongly Trump advocates for policies like tariffs and deportations that could impact the economy, inflation and bankers' prospects.
Sens. Elizabeth Warren and John Hickenlooper say recent data suggests there is "no need for restrictive interest rates" and easier monetary policy is necessary to lower housing costs.
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