Some government-sponsored enterprise reform models could add three or four figures to monthly payments, but others could exert some limited downward pressure, a Stanford Institute for Economic Policy Research report finds.
Estimated mortgage-rate hikes of 0.2% to 0.8% — an additional $500 to $2,000 for the typical homebuyer — could result in certain scenarios, authors Daniel Hornung and Ben Sampson found. Hornung is a SIEPR fellow. Sampson is a PhD student at Stanford University.
The preliminary research models how changes to the GSEs’ guarantee fees and mortgage-backed securities market could change home financing costs in a public offering for common shares, a concept the Trump administration officials have been exploring.
“I think the challenge it illustrates is that it is going to be very hard to come up with a scenario where there is no impact on mortgage rates,” Hornung said of the study.
Mortgage rate impacts could play a role in whether or how the reform moves forward because administration officials have been looking to advance a model that does not adversely affect financing costs.
A look at which scenario would raise rates the least
Selling shares without removing the enterprises from conservatorship or changing their implicit guarantees could result in lenders paying higher fees, but it minimizes the chance reform would negatively impact the premium paid for mortgage-backed securities above “risk-free” treasuries.
Guarantee fees could rise in an offering for new shares or through a “more likely” conversion of some of the government’s senior preferred stock because it would be necessary to produce a sufficient return on equity to attract investors, the study concluded.
Researchers applied Fannie Mae’s recent quarterly g-fee average of 67 basis points to 2023 Urban Institute data. UI found a bank-like return on equity would require an average 89 basis point g-fee increase under GSE capital standards. So a public offering could require a 22 basis point hike.
By passing this through to a recent 6.5% 30-year fixed rate with a standard loan-to-value ratio of 80% and then filtering it into Rocket Mortgage’s formula for loan payments, the study finds the status quo stock offering would add around $500 or more to consumers’ monthly obligations.
Other proposals have looked to reduce taxpayer exposure to the GSEs’ risks by removing them from the conservatorship or taking away the implicit guarantee. The study also examines these scenarios.
President Trump’s comments to date have indicated that he plans to keep the guarantee. The director of the GSEs’ oversight agency, Bill Pulte, has said he defers to President Trump when it comes to the enterprises’ conservatorship status, and foresees the government retaining a tie to the enterprises.
Stanford researchers modeled the rate impact of a common share offering with a conservatorship release while keeping an implicit guarantee by modeling a “commitment fee” Fannie and Freddie Mac would pay Treasury to preserve a form of government support
That fee would likely add another 10 basis points to the rate increase in the first scenario for a total of 32 basis points and could also disrupt the MBS market in ways that could put further upward pressure on financing costs, according to the study.
The researchers calculate that going a step further and removing the implicit guarantee adds a “risk premium” to MBS on top of what’s seen in the conservatorship exit model of roughly 50 basis points, pushing the total above 80.
Avoiding higher rates may be ‘very hard’ but not impossible
The researchers acknowledge their scenarios that examine are limited and that while finding a way to keep rates low or even reduce financing cost could be difficult, options for doing so exist.
“There are some levers that they could pull to try to either keep mortgage rates constant or potentially even give them a modest decrease,” Sampson said.
The report gives a nod to proposals that suggest current portfolio caps could be raised so the enterprises can hold more MBS on their balance sheets as they did pre-crisis.
“Increasing those caps would increase demand for MBS and tighten spreads from a technical standpoint,” Sampson said.
However, it could put the GSEs back in a situation that proved problematic in the past, Hornung said.
“What led to the financial crisis in the first place was this really substantial risk that Fannie and Freddie were holding on their balance sheet in terms of MBS,” Hornung said.
Another concept the report references but does not analyze the rate-impact of is a merger of entities or functions at Freddie and Fannie that could produce efficiencies.
As other experts have noted, the notion of a merger raises a lot of questions about how it would be structured and whether it would require congressional intervention. This makes it challenging to model its impact on rates immediately.
“Our hope is to update this as we get more information about specific policies,” Hornung said.
