Bessent weighs the risk of mortgage interest in the possible release of GSEs

Risks of releasing the GSEs of the Conservatory

Over the years I have discussed the influential role of the GSEs in promoting stability within the mortgage market. Their continuous conservatory has given certainty about the health of the market, which means they can function effectively over the past decade.

This was especially clear during the challenges of COVID-19, where the GSEs played a crucial role in facilitating lending against reasonable mortgage interest and strengthening the US economy. In the early stages of the COVID-19 Pandemie there were concerns among some observers that mortgage loans would become stricter. Although we have experienced some tightening in the non-QM sector (qualified mortgage), the fact that Freddie Mac and Fannie Mae were under conservatory prevented widespread credit restrictions. This turned out to be a big advantage for the US economy in that period.

I am worried about the possible consequences of removing the support from the government from the GSEs. The absence of such support can lead to higher mortgage interest rate, broader mortgage spreads and increased reimbursements. The amount of private capital needed for these two giants would be huge.

Moreover, during the economic tension, the GSEs can get greater limitations when access to credit, which deserves a thoughtful consideration. During a recession, lenders usually delete the credit to minimize losses, because banks have to consider the capital requirements. In the conservatory, however, this care is less important for the GSEs.

Listed companies have the responsibility to give priority to the interests of their shareholders. Recent events have shown that worries about liquidity can significantly influence bank shares. This emphasizes the risk of having publicly traded Fannie and Freddie when the markets go against them.

We could also see higher mortgage costs in states affected by climate change, because the risk of those areas would justify higher prices for listed companies.

Beart adds context

Secretary Bessent has increased important considerations with regard to the possible increase in the mortgage spreads that may result from the GSEs that have been transferred from the conservatory. In the Bloomberg interview, he said that if this process were to lead to higher mortgage interest, a thorough re -evaluation of the decision to continue, is justified.

As illustrated in the graph below, mortgage spreads have been expanded after the Silicon Valley Bank Crisis, which contributes to the increase in mortgage interest observed in 2023. Indeed, the 8% mortgage interest that we experienced during that period could be linked to the deterioration of the spreads. Currently, the mortgage spreads remain higher than historical averages. If we returned to a more typical environment, we would expect the mortgage interest to be closer to 6% instead of 7%. However, if the spreads were to get worse, it is possible that we can see the rates approaching 8%.

After the announcement of the social media of the president, I was initially worried about whether the release process could be accelerated for reasons that we may not yet understand. After hearing bessent, however, it seems that the White House is currently aimed at other priorities, which suggests that there is no immediate urgency to continue with this plan, because the mortgage market is already functional.

I hope that this approach applies, because the process to release the GSEs from the conservatory must be considered thoroughly and carefully to prevent possible negative implications along the line.

Conclusion

The concerns of real estate and mortgage professionals with regard to a GSE – free -free process are valid, especially in the light of the increased mortgage interest that we have experienced. There is a concern that without a suitable backstop of the government after an exit, we can end with higher mortgage interest and less credit availability during a recession. Many in the housing industry believe that maintaining the status quo is favorable: as the adage is: “If it is not broken, don’t repair it.”

If we decrease the statements of the Minister of Finance at nominal value, this process seems thinking and deliberately approached.

Entering with investors will be crucial in assessing the possible effects on the rates, because this is an important decision that has implications in the long term. Given the complexity of the current global economic landscape, we must continue with patience and thorough analysis.