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Privatize Fannie and Freddie?

By Judy Martel ·
Tuesday, December 3, 2013
Posted: 1 pm ET

Ever since the 2008 financial collapse and housing crash, the question of what to do with giant mortgage agencies Fannie Mae and Freddie Mac has sparked debate.

Lately, hedge funds and private equity investors have come forward with proposals to buy the two companies from the government and pump billions into the mortgage market. But is privatization a positive development for potential borrowers or will it better serve the investors? Could mortgage costs and rates be pushed higher under private or semi-private ownership?

The two companies, which guarantee more than three-quarters of all U.S. home loans, went into conservatorship in 2008, forcing taxpayers to step in with a $187 billion bailout. Now they have begun earning huge profits, largely because of a recovering housing market.

More money upfront for mortgages

Jeremy Edwards, lead researcher for IBISWorld, says that if Fannie Mae and Freddie Mac were privatized, there would be an initial injection of cash into the mortgage market that would provide more money for loans. After that, he adds, the effect on potential borrowers is uncertain, as the company would seek a profit to satisfy investors. "It's likely rates would rise," he says.

There's also the matter of the implied government guarantee for the loans that provides some protection for both investors and borrowers. Edwards says the reformed Fannie Mae and Freddie Mac wouldn't completely escape regulation. The government has stated that it wants the private sector to carry the risks on mortgages, but it would still be involved in oversight and as a last-resort loan guarantor.

President Barack Obama has also said that he wants to ensure that borrowers continue to have access to 30-year fixed-rate mortgages.

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