Investors Foregoing Fannie and Freddie Default Guarantees

Many New York lenders sell their co-op and condo mortgages to the federally backed mortgage giants Fannie Mae and Freddie Mac, which stamp them with a repayment guarantee in the event of a default and then sell them off in the form of mortgage-backed securities. In return for the guarantee, bond investors have been willing to accept lower returns. 

That’s changing, the Real Deal reports. In a sign of rising investor confidence in the bullish housing market – and an abiding love for the sort of risks that led to the housing collapse and the Great Recession – investors are increasingly willing to forego the federal guarantee in order to realize higher returns. Sales of these so-called credit-risk transfers are expected to reach a record $15 billion this year, up from $13 billion last year, according to JP Morgan Securities. 

The trend comes as lawmakers debate the future of the two mortgage giants and ponder a potential smaller role for the federal government in the U.S. housing market. The federal government holds Fannie and Freddie in conservatorship, but proposals are being floated to split the two mortgage giants – one for single-family and another for multi-family dwellings. Selling mortgage bonds without the guarantee reduces the role of the federal government in the mortgage market, and some advocates of credit-risk transfers would like to see Fannie and Freddie dismantled altogether, or replaced with private firms.

Regardless of what the future holds, current trends are clear, Moody’s Analytics’ chief economist Mark Zandi told the Wall Street Journal: “The government’s footprint in the mortgage market is receding quickly and significantly.”