with stocks crashing and the economy weakening
everyone is wondering what’s the next domino to fall Believe it or not but it could be the housing
market And that’s because the Trump administration is reportedly planning to privatize two government
companies involved in the mortgage market And this could cause housing prices to fall and mortgage
rates to rise And that’s why today we’re going to bring you up to speed on what’s been going on
and when these changes could come and how they could affect the housing market This is a video
you do not want to miss Let’s start with a bit of history In the 1930s it was extremely difficult
to buy a house and that’s because the down payment was massive and it was hard to get a loan In the
United States the down payment was 50% and the Great Depression made it next to impossible to
get a loan due to the high risks of default And that’s why in 1938 the US government created the
Federal National Mortgage Association or FNMA also known as Fanny May Fanny May basically made it
easier for Americans to get mortgages And in 1968 it became a private company essentially because
it was no longer needed as a government program Of course there were still some Americans who
needed help with mortgages namely those with lower incomes And that’s why in 1970 the US government
created the Federal Home Loan Mortgage Corporation or FHLMC also known as Freddy Mack Interestingly
Freddy Mack also ended up going private in 1989 In any case a contrary to popular belief Fanny
May and Freddy Mack do not issue mortgages What they do do is buy the mortgages from issuers
such as banks bundle them together into financial instruments called mortgagebacked securities
and then sell these securities to investors At first glance you might think well this sounds
like a Ponzi scheme of some kind But upon closer inspection however you realize that this function
is critical to making mortgages affordable especially longerterm ones like the 30-year
mortgages that’s become the standard in America I’ll use an example to explain why Imagine you
take out a 30-year mortgage for $1 million with a 5% interest rates And suppose this mortgage is
issued by a bank Logically this bank is going to be waiting for 30 years until they can get their
money back which is not ideal from an operations standpoint Ideally uh the bank would be able to
sell your mortgage to an investor at a moment’s notice or even just use it as collateral to get
additional cash for money to use in its operations Well the bank would have a hard time finding an
investor much less a lender who could accept your mortgage as collateral And that’s simply because
there would be a significant amount of risk if you failed to repay the mortgage for whatever
reason Whoever owns that loan could lose the money But what if someone like Fanny May took
your $1 million mortgage and combined it with 100 other similar mortgages suddenly there
is significantly less risk for the holders of these mortgages because even if you refail
to pay the mortgage there are 99 other people who probably will continue paying theirs And
this is good for investors especially large investors who are looking for a place where they
can earn a high passive income and they can get it effectively by buying your mortgage and getting
your monthly payments It’s also good for the bank because it doesn’t have to hold your mortgage on
its balance sheet worrying about whether it will need that money It can just sell your mortgage
to Fanny May who will then combine it with other similar mortgages and then sell that mortgage
backed security to big investors More importantly this arrangement is good for home buyers because
it makes it possible to have a 30-year mortgage with just a 5% interest rate You see under normal
circumstances giving someone a 30-year loan would come with a high risk uh would therefore result
in a much higher interest rate than 5% But when you combine multiple mortgages together and make
it possible for other people to invest in these mortgages it has the practical effect of lowering
the interest rate on these mortgages Obviously two of the biggest entities that make it possible
for investors to do this are Fanny May and Freddy Mack To put things into perspective Fanny and
Freddy have a combined 70% market share of the US mortgage market providing nearly a trillion
dollars of liquidity to this market And FYI Fanny May’s focus is larger mortgages while Freddy
Max is smaller mortgages Hence the reason why Fanny makes more money than Freddy Speaking of
statistics we’ve noticed that 36% of the people Fanny May Freddy Mack and the US mortgage market
we can fast forward to 2008 when said mortgage market almost brought down the entire financial
system In short Fanny and Freddy started buying much riskier mortgages from these lenders and
then selling them to the investors As per usual these so-called subprime mortgages were not like
our hypothetical combination of a million-doll mortgage from earlier And subprime mortgages
were a combination of lowquality mortgage loans that probably should have never been issued in the
first place but were nevertheless bundled together and sold to investors When the mortgages within
these securities started going bad key players in the financial system stopped investing and
lending causing a collapse Fanny and Freddy were among the hardest hit because many of the
subprime mortgages that they had purchased and bundled had lost substantial value The result was
that the US government had to step in and bail out multiple financial institutions including Fanny
and Freddy The difference in Fanny and Freddy’s case was that the US government actually
took control of both companies as part of the receiverhip process and forced them to repay
the money For context Fanny and Freddy lost over $300 billion between 2008 and 2011 as housing
prices continued to collapse In 2012 the US government announced that both companies would
repay this money using their profits By 2019 this money was indeed repaid and Fanny and
Freddy have since started keeping the profits they’ve earned as capital reserves in preparation
for a potential return to the private markets That same year the Trump administration actually
planned to make Fanny and Freddy private again but these plans never went into effect As subsequent
interviews with key players involved revealed that it was because they realized how long it would
take to do this process through Congress And this begs the question of why the Trump administration
wants Fanny and Freddy to be private again And the answer really depends on who you ask Uh many
critics believe that Trump wants this because it would cause the stocks of both of these entities
to pump and supposedly enrich insiders However many proponents argue that the de facto takeover
of Fanny and Freddy by the US government has made mortgages artificially cheap and has contributed
to the housing bubble we’ve seen in recent years You see the example we used earlier about
investors buying mortgage backed securities to drive down mortgage costs assumes it’s a free
market where there’s actually risk involved But in reality there are technically next to no
risks for the investors buying these mortgage back securities issued by Fanny and Freddy
because both companies are ultimately backed by the US government And this makes the mortgage
back securities issued by Fanny and Freddy much less risky than others in the eyes of investors
creating a kind of duopoly while simultaneously pushing mortgage rates significantly lower The
result is that housing prices have exploded higher in large part because mortgage rates
have been suppressed by these dynamics making it easier for people to borrow And this has
been good news for those who have qualified for these mortgages but bad news for those
who haven’t And this is where things get a bit complicated because the privatization of Fanny
and Freddy would fundamentally increase mortgage rates which would cause housing prices to fall
But in the short term this could actually make housing even more unaffordable as mortgage
rates would rise while housing prices are still elevated In the longer term housing prices
would indeed fall and become more affordable But this would practically come at the expense
of 65% of Americans who already own homes they would see the cost of their properties
plummet while they continue to pay the mortgage on the original inflated value of their home
To add insult to injury Fanny and Freddy would likely lose market share to other mortgage
lenders if they went public assuming their government guarantee was indeed removed And
this means that even investors in Fanny and Freddy stocks would lose money It seems that
uh nobody would win in this new arrangement But let’s back up a little bit You’ll recall that
the Trump administration was planning on making Fanny and Freddy private back in 2019 but that
these plans never went into effect due to the congressional hurdles For reference it’s believed
that it would take as long as 4 years for Congress to approve their privatization And this begs
the question of how the Trump administration will actually do it The answer is what we’ve seen
Trump do in other contexts and that’s to use the executive branch specifically the Federal Housing
Finance Agency or FHFA and the Treasury Department The former overseas Fanny and Freddy and the
latter provides the government guarantees so to speak As some of you may have heard uh the
FHFA recently got a new director named William Py Uh William is a businessman who’s apparently
very good at buying companies building them up and then selling them off It should come as no
surprise then that the first thing he did after being confirmed by the Senate in March was to
fire multiple board members at Fanny and Freddy and start looking for places to cut costs What is
surprising though is that William supposedly did this for purely operational reasons related to the
Trump administration’s agenda of cutting costs in the government William subsequently stressed
that privatizing Fanny and Freddy was not a top priority and something that would only be done
once the US government had assessed how much their privatization would affect the mortgage market And
this is where the Treasury comes in As I mentioned a few moments ago the Treasury is another entity
involved in the privatization of Fanny and Freddy because it would be the one to decide whether it
continues to provide a government guarantee for the mortgage back securities that they offer
Well so far Treasury Secretary Scott Bessant hasn’t had much to say about Fanny and Freddy
uh just that Trump’s upcoming sovereign wealth fund could invest in both companies Naturally the
media has taken this commentary as confirmation that privatization is imminent when it really
doesn’t seem to be Even so experts on Fanny and Freddy’s privatization such as Chris Wen have
highlighted the fact that the Treasury would still need to provide a government guarantee for there
not to be any major issues in the mortgage market Then again Chris believes that the government
guarantees would be expected regardless After all they bailed them out once before Investors know
they probably would do it again Chris has also underscored the fact that the connection between
Fanny Freddy and the US government means that the credit rating of their mortgage backed securities
would be heavily dependent on the credit rating of the US government If rating agencies downgraded
US debt because of say a debt sealing debate then this would negatively affect Fanny and Freddy
if they were private Moreover even if Fanny and Freddy were able to go private with minimal
impact on mortgage rates it could still create a problem in the long term And that’s because
their privatization would open up the mortgage market to more competition eroding their duopoly
and eventually causing mortgage rates to rise There is a silver lining though and that’s that
Fanny and Freddy are nowhere close to going private Besides assessing the impact on mortgage
rates and coordinating with the Treasury and other key players in the industry Fanny and Freddy need
to build up their capital reserves before going private The Congressional Budget Office estimates
that Fanny and Freddy would need anywhere between 267 and 534 billion in capital reserves to go
private without causing any disruption to the mortgage market Right now their capital reserves
are believed to be somewhere around 150 billion Given that Fanny and Freddy’s combined capital
reserves are growing at a rate of roughly 20 to 25 billion per year this means that it will be
at least another 5 years before either entity is ready to be privatized And if we assume the
upper capital reserve range of $534 billion that timeline increases to 15 years And this brings
me to the big question and that’s what all of this means for the housing market Well in the
short term it means nothing because it looks like it will be years before Fanny and Freddy
are privatized if ever What it means in the longer term depends on whether it actually happens
That said there are two related factors that could affect the housing market in the shorter term The
first one is what I mentioned earlier and that’s the credit rating of the US government The fact
of the matter is that the US stock market bond market and even the economy have been in flux in
recent weeks Not only that but US politicians are currently in the process of passing a spending
bill to raise the debt ceiling which could come with all sorts of issues This could result in
the US debt being downgraded which would result in slightly higher interest rates on all debts
in the US including mortgages And this ties into the second short-term factor that could affect
the housing market and that’s US interest rates specifically the Fed’s rate policy and the
yield on the 10-year government bonds Now for those unfamiliar the Fed affects the short-term
interest rates while the US bond markets affect the long-term interest rates In this case the most
important bond is the 10-year because it’s used to price mortgages If the 10-year yield is say 5%
then chances are that the interest rate on 30-year mortgages would be slightly higher say around 6 to
7% like it is now And that’s because 10-year bonds are seen as a lowrisk source of long-term yield
for investors So all other long-term debts are priced at the 10-year yield plus a few percentage
points to compensate for any additional risk such as the 30-year duration of the mortgage In turn
the 10-year yield is driven by a combination of factors including the Fed’s interest rate policy
economic growth inflation and bond issuance Higher interest rates from the Fed strong economic
growth high inflation and more bond issuance all contribute to a higher 10-year bond yield which
means higher interest rates on US mortgages Well uh let’s just say it’s not looking too good
there The Fed seems determined to keep interest rates higher for longer The US economy has been
weakening but not enough that it’s recessionary Yet inflation is expected to rise because of
things like tariffs and the 10-year bond issuance will increase after the debt ceiling is raised
Notably the 10-year bond issuance will increase even more when the US government stops borrowing
much more money using the short-term bonds Taken together this all suggests that long-term interest
rates will continue rising in the coming years along with mortgage rates If they do then the
effects on the housing market will be almost identical to the privatization of Fanny and
Freddy Lower housing prices but also more expensive mortgages Again in the short term
this could mean housing prices staying high while mortgage rates rise which is almost exactly
what we’ve been seeing in recent months It’s only in the longer term that housing prices would
start to come down which will be good for the 35% of Americans who don’t own homes already uh
the remaining 65% will see the values of their properties fall while also continuing to pay a
big loan The silver lining is that by the time Fanny May and Freddy Mack are privatized
the worst effects of the housing market would have already happened because of other
unrelated factors As such the primary impact of privatization would be that it prevents
a new housing bubble from forming at least until new government programs are introduced
that start blowing the bubble back up again It’s easy to forget that both Fanny and Freddy
were originally government programs intended to help the average person afford a home Over
time these institutions went private and helped create a housing bubble that resulted in the
2008 financial crisis Rather than accept the outcome the US government stepped in kicking the
can down the road And that’s literally what’s been happening since 2008 Everyone knew that someday
we would have to face the reality that the current financial system is unsustainable particularly
the housing market And it looks like we will face this reality regardless of whether Fanny and
Freddy are privatized or not But uh who knows maybe there’s room for another few kicks of that
battered old can before it disintegrates entirely And if you want to learn more about whether
the world could enter a recession check out our latest video on that right over here And if
you’re not subscribed to the channel yet you can do that right over here That’s me for now Thank
you very much for watching and I’ll see you again
