Mortgage giants Fannie Mae and Freddie Mac have languished in financial limbo for years. In the latest push to set a long-term path for Fannie and Freddie, a politically powerful trade group calls for restructuring the mortgage companies into a utility owned by shareholders.

Fannie and Freddie are mostly invisible to homeowners, but they play an important role in the mortgage market. By acting as a backstop for private lenders, Fannie and Freddie keep borrowing costs low and mortgage money flowing.

The National Association of Realtors supports the utility-like arrangement. Under NAR’s proposal, Fannie and Freddie would operate as regulated monopolies, the housing sector’s equivalent of Commonwealth Edison or Florida Power & Light.

“The structure we propose promotes competition, but it also promotes stability,” says Susan Wachter, a University of Pennsylvania Wharton School economist who has been working with NAR on the proposal.

The Realtors trade group is calling attention to its proposal at an uncertain moment for Fannie and Freddie. The Trump administration had hoped to return the entities to private ownership but lost power before achieving that goal. President Joe Biden seems less eager to pursue privatization.

What Fannie and Freddie do

Fannie and Freddie don’t lend directly to homebuyers. Instead, the two “government-sponsored enterprises” buy mortgages from lenders, then package loans into securities that are sold to investors. Fannie and Freddie back about half the $11 trillion in mortgages outstanding in the U.S.

While they usually fly below consumers’ radar, their underwriting policies occasionally become apparent to borrowers. For instance, last year Fannie and Freddie tightened rules for self-employed borrowers. In another response to the coronavirus pandemic, Fannie and Freddie in December began imposing a new “adverse-market fee” on mortgage refinancings.

While Realtors, lenders and consumer advocates criticized the fee, the regulator overseeing Fannie and Freddie said the charge was crucial to shoring up the nation’s mortgage market.

“It is critical to remember that this fee covers losses that are the result of policies that have helped millions of Americans stay safe in their homes during a global pandemic,” Mark Calabria, director of the Federal Housing Finance Agency, said last year.

The collapse, rebound of Fannie and Freddie

During the housing bubble of 2004 to 2007, Fannie and Freddie engaged in risky lending. That strategy soured when U.S. home prices collapsed.

Rather than let Fannie and Freddie fail, the U.S. government took them over in 2008, an arrangement known as conservatorship. In the years since, home prices have bounced back, and mortgage markets have returned to health.

Still, the fates of Fannie and Freddie have been uncertain. Calabria, former chief economist to former Vice President Mike Pence, took over in 2019 as director of the Federal Housing Finance Agency. His mission was to privatize the two lending giants.

For Calabria, the lessons of the crash loomed large. He said last year that Fannie and Freddie were “not close to safety and soundness.

“In their current condition, Fannie and Freddie will fail in a serious housing downturn,” Calabria said.

Those concerns drove the FHFA to establish new capital rules for Fannie and Freddie. The companies had been allowed to hang onto just $45 billion in profits, with any amounts above that going to the Treasury. In November, the FHFA raised that amount to $280 billion.

A flurry of ideas, but no solution so far

It’s unclear exactly how a restructuring of Fannie and Freddie would affect consumers. But creating a more stable structure for Fannie and Freddie will set the entities up for long-term success, says Ken Fears, NAR’s policy expert on mortgage finance. While mortgage borrowers have enjoyed rock-bottom rates and reasonable fees, Fears says uncertainty looms below the surface.

“It isn’t clear that what we have today can survive over the long term,” Fears says.

The utility concept is just the latest proposal to gain traction in Washington. Don Layton, the former chief executive of Freddie Mac, says mortgage giants have been in a “policymaking hothouse” since the Great Recession. Policymakers and mortgage experts have floated a variety of proposals. Among the ideas considered and dismissed were an industry cooperative, permanent government control and the creation of a number of competitors to Fannie and Freddie.

“We’ve gone through a lot of gyrations,” Layton says.

Not everyone thinks the structure needs to change. Ed Golding, the former head of the Federal Housing Administration and now executive director of the MIT Golub Center for Finance and Policy, says the current scheme functions well.

“People say conservatorship can’t go on forever,” Golding says. “I say why not?”

At any rate, Golding says it’s unclear how a utility-style structure will benefit consumers. He says the proposal’s proponents should hone their pitch.

“I think they can make a better argument on why this lowers the cost,” he says.

Wachter, for her part, envisions the new-look Fannie and Freddie attracting investors by promising a steady dividend. “There are investors who prefer stability, and they’ll pay up for that,” she says.

Learn more: