Eliminate Fannie Mae? The Impact on the Reverse Mortgage Industry

Housing Financial Services Committee Chairman Barney Frank said that the committee will examine ways to replace the two housing government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac

"The remedy here is…as I believe this committee will be recommending, abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance," said Frank.

While Frank didn’t elaborate on forthcoming recommendations, the Wall Street Journal is reporting that one possible revamp could merge some functions of Fannie and Freddie that overlap with the Federal Housing Administration into the government mortgage-insurance agency.

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While there is no easy answer to Fannie Mae, RMD looked into what sort of impact the elimination would have on the reverse mortgage industry.

At one point Fannie Mae was the only investor purchasing HECMs and its market share of the total market of outstanding reverse mortgage loans was approximately 90% as of December 31, 2008 according to an SEC filing. 

After a drastic change in pricing strategy, lenders turned to Ginnie Mae for execution and for the most part haven’t looked back.  According to its 3Q filing, Fannie Mae saw its market share of HECM acquisitions fall to 20% during the quarter and to 10% in September 2009.

Even with its market share dwindling, the loss of Fannie Mae would remove an important whole loan investor says Joe Kelly, Partner at New View Advisors.

“The impact on the reverse mortgage industry would be negligible for fixed rate HECM, but would affect adjustable rate HECMs,” said Kelly in an email to RMD.  The GSE has been the primary buyer for adjustable rate products, especially for mortgage bankers who lack the capacity to issue adjustable rate Ginnie Mae HMBS.

Even if the industry ends up losing Fannie Mae, Kelly thinks it could be positive for the industry in the long run.  “Necessity being the mother of invention, I’m sure the reverse mortgage industry would adapt.” 

“Securitization and full integration into the capital markets looks more and more like the future of the reverse mortgage industry. Fannie provided a lot of valuable liquidity in the past, but did not innovate.”

Fannie Mae, Freddie Mac Should Be Eliminated, Frank Says (WSJ)