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Privatization speculation

Pulte’s bold moves have ignited speculation the Trump administration is pushing to privatize Fannie Mae and Freddie Mac. Both are government-sponsored entities (GSEs) and have been under federal conservatorship since the 2008 financial crisis in which they were bailed out. Together, the companies back 70% of the mortgage market, according to The New York Times. Skeptics believe privatization would make buying a home more expensive in the midst of a housing affordability crisis.

“It would mean that mortgage rates would increase — definitely,” Laurie Goodman, founder of the Housing Finance Policy Center at the Urban Institute, a think tank in Washington, D.C., said to the news publication.

Meanwhile, privatization could be a boon for both investors and the federal government. Depending on the structure of the deal, privatizing could generate billions of dollars in revenue for an administration that’s focused on cutting down wasteful spending across the board. Placing these companies in private hands would also free the government from potential future bailout obligations.

For his part, Pulte has struck a measured tone publicly. He told CNN that “it’s critical to ensure any discussion about exiting conservatorship needs not only to ensure safety and soundness but how it would affect mortgage rates.”

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Impact on the housing market

Why do critics think privatizing these entities would increase borrowing rates? Fannie Mae and Freddie Mac don’t directly issue mortgages — rather they buy mortgages from lenders and package them for investors as securities. This maintains cash flow within the mortgage industry, allowing lenders to offer stable, affordable rates, experts say.

But if the federal government no longer backs these entities, their safety net goes with it.

“When the government is backing an entity's products and services, it helps to reduce risk, especially in the generating of loans,” Alex Beene, financial literacy instructor for the University of Tennessee at Martin, told Newsweek. “Removing it opens the door to higher interest rates for those looking to buy or refinance. It could also lead to more restrictive policies in even getting a loan, as lenders react more cautiously to some buyers.”

Increased rates could affect affordability, particularly for first-time buyers or those with modest incomes already stretched thin by soaring home prices.

As for homeowners with existing mortgages may also be affected if they ever want to refinance their loan. It may be less likely you can reduce your monthly payments if you’re struggling to get by.

The long-term impact of this housing shakeup remain uncertain, however, homebuyers and homeowners could serve themselves well by staying informed so they can navigate potential changes effectively.

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Chris Clark Freelance Contributor

Chris Clark is freelance contributor with MoneyWise, based in Kansas City, Mo. He has written for numerous publications and spent 18 years as a reporter and editor with The Associated Press.

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