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)

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  • Joe is obviously not a mortgage banker. While his long-term view will no doubt come true, what will mortgage bankers do between the date of termination and the fulfillment of his prophecy?

    It is not the present or the time when an alternative is available that is the problem; it is the transition. It would be good if Joe would help create a bridge addressing the transition. That is the hard and least rewarding part with this type of change.

    Hopefully this change will not occur in the near term.

  • The conditions that led to the creation of the GSEs in the first place no longer exist, and perhaps they have outlived their usefulness. Fannie Mae was created as part of the New Deal in order to provide liquidity and order to a secondary mortgage market that was then in its infancy. Because its securities carried an implicit government guarantee, investors had the confidence to purchase them.

    Today, in spite of the mortgage meltdown, there remains a robust secondary mortgage market, although its demand for stated-income loans has diminished.

    The majority of “conforming” loans have been packaged into Fannie- or Freddie-guaranteed MBS, rather than purchased by those agencies as whole loans. The GSE function could be taken over by the private sector through the involvement of PMI companies and rating agencies. The risk could be managed through prudent origination and underwriting of the loans. Admittedly, this could result in a slight increase in mortgage rates as the government no longer would be involved as a guarantor of last resort.

    • Your comments are well taken. However, none of the things you state provide much difficulty. It is the turmoil in the transition that causes concern. With the mortgage industry in as much difficulty as it is in now, adding more turmoil and uncertainty right now does not seem to be a good course of action.

      • Critic,

        I do agree with you 100%. The last thing we need in present day time is any more turmoil in the industry. The transition would take time and like any major government move like this, would create havoc and consumer suffering.

        Our legislators and Barney Frank are not mortgage bankers, they show it in their actions daily.

        The future may hold the elimination of FNMA and Freddie Mac. The replacement vehicle needs to be well thought out. There is a lot to consider from a world wide standpoint.

        It will be interesting to see what format will be suggested? Thank you Critic.

        John Smaldone

      • John,

        Like so many things in life, timing is everything. Hopefully, cooler minds will prevail. Best regards.

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