Housing: Fannie Mae, Freddie Mac to back home loans of nearly $1 million

The Yahoo Finance Live panel discusses the news that Fannie Mae and Freddie Mac will back home loans of nearly $1 million.

Video transcript

JULIE HYMAN: This is a really interesting marker here because Fannie Mae and Freddie Mac have sort of fallen into the background a bit in recent years and during the pandemic. But the idea that the federal government would backstop mortgages of this size at one time would have been ridiculous to even discuss, in part because of the criticism from some quarters that these agencies come under, Brian Cheung. And so, you know, I don't know if it says more about Fannie and Freddie and the sort of evolution on thinking about them in the government or just about the housing market and the incredible inflation values that we've seen.

BRIAN CHEUNG: Yeah, well, I think that certainly Fannie Mae and Freddie Mac still being in conservatorship, you know, what, over 10 years since the financial crisis has definitely been something that has been drawing the ire of a lot of those down in the Washington Beltway circle and also those who have been stuck holding the bag with these shares of Fannie Mae and Freddie Mac over that decade period.

But of course, I think that when we talk about what's going on specifically with the news this week, it really has more to do with the rising prices in the housing market, again increasing the maximum size of the home mortgage loans that are eligible for the government backing that Fannie Mae and Freddie Mac do, going up to, what, $970,000 and change next year and especially those high cost markets.

That's a lot because of the fact that the S&P CoreLogic Case-Shiller Home Price Index showed a 19.5% annual gain in September prices across the board, even though it's mostly been focused in a lot of these high pressure markets. And you look at Phoenix, for example, has been something that has required the whole mortgage industry to have to reprice and shift and change their model for everything. And that includes the government backing themselves.

But I just want to remind all of those who might not be familiar with kind of how this whole system works that it's not Fannie and Freddie that are doing the originating of the mortgages themselves. It's still the lender in your local area, be it a bank, for example, that wants to underwrite, for example, a $965,000 home loan. They then sell that to Fannie Mae and Freddie Mac.

So, really, the idea here is that this change here is probably going to incentivize a lot of these bankers to unload those mortgages onto the government and have them backed once that change is made next year. So you're going to see a lot of origination happening through the final weeks of 2021 into the beginning of 2022. And then they'll ultimately sell those off to the government.

BRIAN SOZZI: This story reminded me, Julie, back in 2006, I used to cover Fannie Mae and Freddie Mac as an analyst. What an absolute dreadful, horrible, terrible experience that that was. I mean, I can remember sleeping at my desk, covering earnings calls from these companies. I mean, they were just absolutely awful. I'm so glad I don't have to do that anymore. Really, it was just dreadful. I'm surprised I even survived it.

JULIE HYMAN: What made it so awful, Sozz?

BRIAN SOZZI: Just so boring. And they talked about these things. And really, nobody had any idea on what they were talking about. And then, secondarily, just the hype on these earnings calls amongst these really fat cat executives, it was just awful, just an awful experience. Awful. I hope it never comes up again.

BRIAN CHEUNG: Well, for what it's worth, I'll say that the political tone around Freddie Mac and-- around Fannie Mae and Freddie Mac-- I always mix them up-- is really-- it kind of changed once the Trump administration came into place in 2017, because they had installed Mark Calabria as the head of the Federal-- as head of the FHA. He was formerly at the Cato Institute, was very much kind of this free market guy who was advocating for releasing both these government sponsored enterprises from conservatorship.

Now, over the course of four years, what we found was that a lot of the bureaucracy and a lot of the challenges in completely changing the way that home mortgages are kind of originated and then backed and packaged in this country was just simply too entrenched to undo that easily. And in fact, now that Mark Calabria is no longer the head of the FHFA, it seems like that opportunity to try to privatize those two agencies has likely passed.

So, again, I think that the story for both these agencies is that they're still in conservatorship. There's no sign that they'll exit that anytime soon. It's really just kind of about the nuances of how they go about this system that can be tweaked and changed. And I think what we're seeing this week with home price appreciation is very much going to be a part of that narrative going forward.

JULIE HYMAN: Yeah, and if the Trump administration couldn't get them out of conservatorship, I certainly don't think it's going to happen under the Biden administration.