David P. Sims, CPA Blog | Question Received From Reader: How will Mortgage Insurers Benefit from GSE Privatization? | Talkmarkets
Certified Public Accountant

David Sims is a Certified Public Accountant residing in Richmond, Virginia.

Question Received From Reader: How will Mortgage Insurers Benefit from GSE Privatization?

Date: Thursday, December 1, 2016 9:37 AM EDT

This morning, I got a question from someone that follows me on Seeking Alpha. This is what they asked, "How will mortgage insurers benefit from GSE privatization?"

To begin, let's clarify what these terms mean. GSE refers to the Government Sponsored Entities, Fannie Mae (FNMA) and Freddie Mac (FMCC). They insure mortgage backed securities against loss. A mortgage insurer is a company that provides insurance against a borrower defaulting on their loan. Most mortgage consumers are familiar with the insurance they pay as part of their mortgage payment each month. Well known insurers include Radian (RDN) and MGIC (MTG).

Privatization of the GSEs has become a hot topic since the election of Donald Trump. Every day new information comes to light about who will lead the new Administration. Yesterday, we learned that Steven Mnuchin would be Treasury Secretary, possibly. He has ties to shareholders Bruce Berkowitz and John Paulson, each institutional shareholders of Fannie and Freddie. Paulson is an advisor to the Trump Administration as well.  Mnuchin plainly stated that the government should not own Fannie and Freddie.

While the path to privatization is unclear, there could be many benefits. To start, mortgage lenders should expect less loan put-backs from private Fannie and Freddie.  Since the financial crisis, millions of loans have been sent back to their originators because of flaws in the underwriting process. Most of those loans were delinquent and the originator took losses. Fannie and Freddie did this to save taxpayers from taking losses on the loans and they had some justification because the loans had errors.  Private companies can take less direction from regulators about forcing the loans back and make more business decisions, which could include encouragement of lenders to make loans.

If mortgage originators are less fearful of taking losses, they will make more marginal loans and loans outside the tight credit box. The homeownership rate in this country is at a 20-year low currently.  This is partly due to conservatism in the underwriting process, as lenders want to avoid punishment for taking a lenient approach with borrowers. Making more loans increases the supply of home loans and therefore increases the demand for purchase mortgage housing. Home builders should get a boost, but so will home prices.  People that might be upset about loosening lending standards should take a look at mortgage rates and realize that it has never been cheaper to take on mortgage debt. This is a benefit to consumers, especially when using a fixed rate mortgage.

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