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A detached garage, garden shed or accessory dwelling unit could spell doom for homeowners regarding their property coverage. Just under half, or 45%, of residential properties nationwide have at least one additional structure besides their home, according to an analysis by ZestyAI, a property risk analytics firm. The extra buildings can go unnoticed by insurers, which could exacerbate insurance claims. "Homeowners' carriers are often left in the dark on the presence of secondary structures and their value," the report said. "Incomplete information from policyholders or agents and manual processes creates fertile ground for inaccuracies."The findings did not state a specific rate of underinsurance, or dollar figures behind potential damages. But they come on the heels of a ramp-up nationwide in insurance costs, driven by a multitude of factors including climate catastrophes. The artificial intelligence insurance firm sampled 1 million residential properties. No state had less than 26% of residential properties with secondary structures; rural states had higher shares, led by Montana with 59% of properties identified. Those extra buildings included barns, sheds and guest cottages. Georgia and North Carolina had 26% and 29% of homes with secondary structures, respectively. Densely-populated areas where local governments have encouraged ADU construction contributed to the rise, according to ZestyAI.In addition, 11% of homes had 3 structures, while 4% included 4 or more buildings. "It's challenging for insurance carriers to identify all structures on a property," the report read. "The third or fourth structure could go undetected even when a secondary structure is found." The company revealed its findings alongside its launch of Multi-Structures, a product providing insurers with aerial views of properties mixed with non-imagery data for clearer assessments. Residential insurers this year have pursued large rate hikes, and in some markets pulled back underwriting, in response to larger climate-related losses and inflation heating up reconstruction costs. More recently, mortgage delinquencies in November rose on borrowers affected by Hurricanes Helene and Milton. Other dangers to residential structures are also rising. Hail was responsible for the largest percentage of insured property loss in 2023, according to Corelogic. The frequency of natural disaster claims along with nonweather incidents like water leaks and theft also rose 52% last year, the firm found.

The Federal Reserve is open to changing its stress-testing practices in hopes of heading off potential future legal challenges.On Monday, the Fed said it would ask the public for input next year on how to make the annual tests more transparent and the capital requirements that come from them less prone to year-to-year swings.In its announcement, the central bank cited recent legal developments as the impetus for the review."The framework of administrative law has changed significantly in recent years," the Fed stated. "The board analyzed the current stress test in view of the evolving legal landscape and determined to modify the test in important respects to improve its resiliency."Mandated by the Dodd-Frank Act of 2010, the Fed tests the nation's largest banks each year to determine if they have enough capital to withstand a negative economic shock. The hypothetical losses registered in these exams are used to establish the bank-by-bank regulatory requirement known as the stress capital buffer. As part of the comment period, the Fed intends to disclose the models it uses to estimate hypothetical bank losses and revenues under stress to allow for public commentary on them. It is also considering averaging stress-test results over a two-year period to reduce the volatility of its resulting capital charges and allowing public commentary on scenarios ahead of each test.The issues raised and potential changes track closely with reforms called for by Fed Gov. Michelle Bowman in a speech earlier this year."It is important that regulators consider the lessons learned from past tests and feedback from banks and other members of the public to ensure that stress testing is fair, transparent and more useful going forward," Bowman said in September.It has been years since a bank has "failed" the stress test — which happens when a bank's common equity tier 1 capital falls below 4.5% as a result of the hypothetical scenario — yet many banks have seen steadily greater stress capital buffers because their projected losses increase from one year to another. This paradox of passing the test but still seeing greater capital charges has frustrated the Bank Policy Institute and other large bank interest groups. These organizations have called on the Fed to make its testing methods more transparent so banks know what they are up against, arguing that not doing so violates the Administrative Procedure Act.BPI President and CEO Greg Baer issued a statement Monday afternoon calling the notice-and-comment period a step in the right direction."Since 2019, BPI has expressed fundamental concerns about the Federal Reserve's stress-testing process. Inaccuracy in testing historically has produced excessive capital charges that have reduced lending and economic growth," Baer said. "The board's announcement today is a first step towards transparency and accountability. We are reviewing it closely and considering additional options to ensure timely reforms that are both good law and good policy."Industry groups have not threatened litigation on the matter, but their prospects in a potential lawsuit have improved significantly in recent years, thanks to several key Supreme Court decisions that have upended decades-long norms in the administrative law space. This year's ruling in Loper Bright Enterprises v. Raimondo ended the practice known as the Chevron deference, in which courts were instructed to defer to agencies on interpreting unclear statutes. Another pivotal ruling came in 2022 in the West Virginia v. EPA case, which created a framework known as the "major questions doctrine." The legal principle prohibits agencies from making decisions of "vast economic and political importance" without authorizing legislation.Other, more banking-centric cases have also yielded critical decisions, including Corner Post Inc. vs. Federal Reserve Board, which extends the window within which companies can challenge regulatory rulemakings. Yet, while bank groups have insisted that transparency will make the stress tests more effective, consumer advocates and others argue that such a move will only open the door for banks gaming the test. Any changes that result from the comments would not apply to next year's stress test, which has been in development for months and will soon be used to evaluate large banks. They also will not apply to scenario testing that is not related to specific capital charges."The Board will continue its exploratory analysis, which assesses additional risks to the banking system in ways that are separate from the stress test," the Fed stated. The analysis would be used to inform bank supervision and financial stability assessments. It will continue to be disclosed in aggregate and not affect bank capital requirements."The Fed did not specify precisely when it will initiate the notice-and-comment period on stress testing, only noting that it would happen in the "early part of 2025." It also did not specify how long the comment period would be open.

The Consumer Financial Protection Bureau is accusing Rocket Homes, the real estate arm of Rocket Mortgage, of initiating a kickback scheme between itself and The Mitchell Group, a real estate brokerage, to boost origination business.In a complaint filed Monday, the watchdog claims Rocket Homes gave referrals and other incentives to brokerages under an agreement that they would refer business to Rocket Mortgage and Amrock, the megalender's title, closing and escrow company.The Mitchell Group was an "enthusiastic partner" in the kickback scheme and allegedly referred thousands of clients to Rocket and Amrock. Some of these referrals were egged on by the promise that agents referring the most business to Rocket would receive a $250 gift card, the CFPB claims.The drive to pump more business to Rocket resulted in borrowers not receiving all available loan information, especially if it could potentially sway them to another mortgage lender, the regulator said. Specifically, the CFPB said Rocket censored agents from talking about the availability of down payment assistance programs, "which often save homebuyers thousands of dollars."  According to the CFPB, Rocket Homes "punished real estate agents who helped their clients obtain DPA if Rocket Mortgage didn't participate in those programs."Rocket also charged higher rates and fees to consumers who went through the Rocket Homes network compared with those that didn't, the bureau claims in its suit filed in a Michigan federal court."Rocket engaged in a kickback scheme that discouraged homebuyers from comparison shopping and getting the best deal," said CFPB Director Rohit Chopra in a press release. "At a time when homeownership feels out of reach for so many, companies should not illegally block competition in ways that drive up the cost of housing."Rocket Homes dubbed the allegations "false and a distortion of reality.""The accusation that homebuyers paid more when working with Rocket Homes is a lie. Additionally, the notion that Rocket Homes penalized real estate brokers or agents for helping clients compare rates and choose the best lender for them is also a lie," a Rocket press person wrote in an email. "Director Chopra's transparent ploy to bolster his political agenda before the changing of administrations is a reckless and shocking misuse of public resources."The Jason Mitchell Group could not be reached.The CFPB accuses the companies and Jason Mitchell, the brokerage's CEO, of violating the Real Estate Settlement Procedures Act. It's suing to stop the kickback scheme and obtain an undisclosed civil penalty that will be deposited to its victims relief fund.

In a case involving phony documents and unpaid taxes, a prominent Washington, D.C.-based accountant pleaded guilty last week for making false statements on a mortgage application after failing to file IRS returns.A certified public accountant with expertise on tax compliance and due diligence matters, Timothy Trifilo has held partner or managing director positions at several firms for over four decades. He also taught courses in taxation and real estate as an adjunct professor, the original Department of Justice indictment said. Trifilo was hired as a managing director with consulting firm Alvarez & Marsal earlier this year. The fraud allegations resulted from a 2023 purchase, when Trifilo applied for a $1.4 million mortgage on a Washington property. When the unidentified issuing bank advised that they could not locate recent tax returns nor approve his application without them, Trifilo submitted copies of 2021 and 2022 IRS filings to the lender, who then originated the loan.  Investigators later discovered that, in reality, Trifilo had neither filed returns nor paid taxes for any year beginning in 2012 despite income over the subsequent decade totaling more than $7.7 million. His annual earnings ranged between $636,051 and $948,252 during that time, amounts that required him to file individual tax returns each year.On documentation delivered to the lender in support of the mortgage application, a former colleague of Trifilo was identified as responsible for preparing, reviewing and signing the falsified returns purportedly submitted to the Internal Revenue Service.  "This individual did not prepare the returns, has never prepared tax returns for Trifilo and did not authorize Trifilo to use his name on the returns and other documents that Trifilo submitted," a DOJ press release said.  A grand jury originally indicted Trifilo in September on seven counts, including bank fraud and failure to file tax returns, as well as aggravated identity theft. His actions led to a tax loss for the IRS of $2.1 million. He faces a maximum sentence of three decades in prison for defrauding the lender, as well as one year for failure to file tax returns. Sentencing is scheduled for May 19. In addition to potential prison time, Trifilo may be required to forfeit the original loan amount and property acquired through bank fraud, the original indictment stated. He also faces a period of supervised release, monetary penalties and restitution. Attorneys from the DOJ's tax division prosecuted the case, with evidence based on findings from the IRS criminal investigation unit. Submission of phony forms and documents have played a role in multiple fraud cases this year, pointing to a pain point in the mortgage process that could end up costing lenders. Problems in income and employment data specifically had a defect rate of 37.01% to lead all underwriting categories between March and June this year, according to Aces Quality Management. The number surged from 23.42% in the first quarter.Aces' report found overall defect rates of originated mortgages rising in both the first and second quarters. 

The Federal Housing Finance Agency is tweaking some existing language around government-sponsored enterprises' scorecard goals and adding a passage related to artificial intelligence as it heads into 2025.References to "climate" and "equitable housing" remain in the mission-oriented half of the scorecard, but they have been scaled back in number. Also the safety-and-soundness half of the scorecard aims now includes a reference to risk management for AI and machine learning.Overall, the goals "address affordability challenges in the housing market, facilitate greater supply and resilience of the nation's housing stock, improve efficiency in mortgage processes and promote sustainability," FHFA Director Sandra Thompson said in a press release."These objectives are consistent with FHFA's responsibility to ensure the enterprises fulfill their mission of promoting liquidity and access to sustainable mortgage credit in a safe and sound manner," she added.The GSEs, Fannie Mae and Freddie Mac, are entering a period when Republican leadership will be more prominent than those on the Democratic side after November's election results, so the form they take could ultimately change.If the second Trump administration next year proves to be similar to the first, FHFA could de-emphasize equitable housing and climate-related initiatives.There's also been some debate as to whether a legislatively-mandated credit-score update and separate tenant protections will move forward in their current form next year.As they stand, the scorecard goals indicate the FHFA wants to see the enterprises follow through on implementing modernized credit score models it approved.Also anticipated next year are possible changes to the GSEs' multifamily program.One aspect of multifamily goals that some pundits think could change are resident requirements that include tenant protections.There's also some speculation as to whether or not a workforce housing exclusion to the multifamily caps in the scorecard will be retained next year. Pundits are split on whether it will stay because workforce housing has had more bipartisan support than other exclusions.During Trump's first term, then FHFA Director Mark Calabria removed exclusions added during the Obama administration. At the time, the exclusions were more broadly focused on affordable housing efforts, including loans funding energy- or water-efficiency improvements. Calabria did increase the amount of lending done under the cap required to be in line with the GSEs' housing mission. Energy/water-efficient improvements remain part of the mission-related quota in the most recent scorecard.Republicans also could resume efforts to strengthen Fannie and Freddie's finances enough to recapitalize and release both GSEs from conservatorship in line with efforts during the first Trump term. This could put more emphasis on the safety-and-soundness half of the scorecard.The scorecard the FHFA draws up yearly applies not only to the two influential loan buyers but also an entity overseeing the fungibility of their bonds. Those bonds are at the center of one of the policy issues the industry will be closely watching next year.Mortgage and securities groups have been frustrated by a fee applied to the GSEs' securities as a result of actions during the first Trump term, which they say undermines the concept their bonds are interchangeable. Under Biden that fee was scaled back but not removed, so the industry is hoping it might be eliminated entirely but it also has some concern it could be returned to its larger size.The latest scorecard does not make specific mention of the fee. It was originally added with the aim of supporting the GSEs' larger goal of financial soundness.

With home prices out of reach for many and affordability the worst it’s been in decades, a lot of folks are talking about another housing crash.However, just because buying conditions aren’t affordable doesn’t mean we’ll see cascading home price declines.Instead, we could just see years of stagnant growth or real home prices that don’t actually keep up with inflation.All that really means is that homeowners won’t be seeing their property values skyrocket like they had in years past.At the same time, it also means those waiting for a crash as a possible entry point to buy a home might continue to be disappointed.This Chart Perfectly Sums Up Then Versus NowJust consider this chart from the Federal Reserve, which breaks down the vintage of today’s mortgages. In other words, when they were made.It shows that a huge chunk of the outstanding mortgage universe was made in a very short window.Basically 60% of outstanding home loans were made from 2020 to 2022, when 30-year fixed mortgage rates were at their all-time lows.To contrast that, something like 75% of all outstanding loans were originated from 2006 to 2008.Why does that matter?  Because underwriting standards were at their absolute worst during those years in the early 2000s.This meant the vast majority of home loans originated at that time either shouldn’t have been made to begin with or simply weren’t sustainable.In short, you had a housing market that was built on a house of cards. None of the underlying loans were of good quality.The Easy Credit Spigot Ran Dry and Home Prices CollapsedOnce the easy credit faucet was shut off, things came crashing down in a hurry.Back in 2008, we saw an unprecedented number of short sales and foreclosures and other distressed sales. And cascading, double-digit home price declines nationwide.It only worked as long as it did because financing continued to loosen on the way up, and appraisals continued to be inflated higher.We’re talking stated income loans, no doc loans, loans where the loan-to-value ratio (LTV) exceeded 100%.And serial refinancing where homeowners zapped their home equity every six months so they could go buy new cars and other luxuries.Once that stopped, and you couldn’t obtain such a loan, things took a turn for the worst.More Than Half of Recent Mortgages Were Made When Fixed Rates Hit Record LowsNow let’s consider that the bulk of mortgages today are 30-year fixed-rate loans with interest rates ranging from 2 to 4%.It’s basically the complete opposite of what we saw back then in terms of credit quality.On top of that, many of these homeowners have very low LTVs because they purchased their properties before the big run-up in prices.So they’re sitting on some very cheap fixed payments that are often significantly cheaper than renting a comparable home.In other words, their mortgage is the best deal in town and they’d be hard-pressed trying to find a better option.There has also been underbuilding since the 2010s, meaning low supply has kept low demand in check.Conversely, in 2008 the mortgage was often a terrible deal and clearly unsustainable, while renting could often be a cheaper alternative.Homeowners had no equity, and in many cases negative equity, combined with a terrible loan to boot.Said loan was often an adjustable-rate mortgage, or worse, an option ARM.So homeowners had very little reason to stick around.  A loan they couldn’t afford, a home that wasn’t worth anything, and a cheaper alternative for housing.  Renting.There Are New Risks to the Housing Market to Consider TodayThey say history doesn’t repeat, but that it rhymes. Yes, it’s a cliché, but it’s worth exploring what’s different today but still a concern.It wouldn’t be fair to completely ignore the risks facing the housing market at the moment.And while it’s not 2008 again, there are several challenges we need to discuss.One issue is that all other costs have gone up significantly. We’re talking car payments, insurance, groceries, and basically all other non-discretionary needs.For example, you’ve got homeowners insurance that may have gone up 50% or even more.You have homeowners who have been dropped by their insurance who then need to get on a state plan that’s significantly more expensive.You have property taxes that have jumped higher. You have maintenance that has gotten more expensive, HOA dues that have gone up, etc.So while the mortgage might be cheap (and fixed), everything else has gone up in price.Simply put, there’s heightened potential for financial stress, even if it has nothing to do with the mortgage itself.This means homeowners are facing headwinds, but they are unique challenges that differ from the early 2000s.What might the outcome be? It’s unclear, but homeowners who purchased pre-2021 and earlier are probably in very good shape.Between a record low mortgage rate and a home price that was significantly lower than today’s prices, there’s not a lot to complain about.Recent Home Buyers Might Be in a Tough SpotYou can see on the chart above that mortgage lending volume plummeted as mortgage rates jumped higher in early 2022.This is actually a good thing because it tells you we have sound home loan underwriting today.If loans kept being made at high volumes, it would indicate that the guardrails implemented because of the prior housing crisis weren’t working.So that’s one big safety net. Far fewer loans have been originated lately. But there have still been millions of home buyers from 2022 on.And they could be in a different boat. Perhaps a much higher loan amount due to a higher purchase price.And a higher mortgage rate as well, possibly a temporary buydown that is going to reset higher. Not to mention higher property taxes, costly insurance premiums.For some of these folks, one could argue that renting might be a better option.It could in fact be cheaper to go rent a comparable property in some of these cities throughout the nation.The problem is, it could also be difficult to sell if you’re a recent home buyer because the proceeds might not cover the balance.It’s not to say short sales are going to make a big comeback, but you could have pockets where there’s enough downward pressure on home prices where a traditional sale no longer works.Another thing that’s unique to this era is the abundance of short-term rentals (STRs).Certain metros have a very high concentration of STRs like Airbnbs and in those markets it’s gotten very competitive and saturated.For some of these homeowners, they might be interested in jumping ship if vacancy rates keep rising.Of course, the vast majority probably bought in when prices were a lot lower and they have those ultra-low fixed mortgage rates as well.So it’s unclear how much of an issue you would have if only a handful actually unload at once.Housing Affordability Today Is Worse Than 2006Still, there are risks, especially with affordability worse than it was in 2006, per ICE.But given financing has been pretty tight and loan volume very low lately, it still seems difficult to see a big downturn.That being said, real estate is always local. There will be cities under more pressure than others.It’ll also be a pivotal year for the home builders, who have seen their housing inventory increase.If anything, I would be cautiously watching the housing market as we head into 2025 as these developments play out.However, I wouldn’t be overly-worried just yet because it remains an issue of unaffordability.  And not a financing problem like it was back then, which tends to drive bubbles. Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.Latest posts by Colin Robertson (see all)

Mortgage leaders have their regulation wish list ready for the Trump administration and a Republican-dominated Congress.Their agenda includes calls to reverse or walk back Biden-era rules and proposals that could hinder opportunities for homeownership or hurt industry players themselves. Other trade group efforts will focus on longstanding regulations like the loan officer compensation rule, or legislation like the Real Estate Settlement Procedures Act.The president-elect is expected to usher in an era of deregulation, although how that will extend to housing remains uncertain. Trump has made just one nomination to a housing post, and despite outside noise has been mum on the Consumer Financial Protection Bureau. Amid the pre-inauguration uncertainty, experts are optimistic for future productive dialogue with the incoming government."I take the rhetoric at face value that they're very concerned both with reducing ineffective or duplicative regulation and also unlocking more housing affordability and housing supply," said Justin Wiseman, vice president for residential policy and managing regulatory counsel for the Mortgage Bankers Association.National Mortgage News spoke with industry trade groups regarding what suggestions they'll have for the incoming administration and legislators.

Holiday decorations are a point of contention for homeowners whose properties are in locations governed by an association, a report finds.While front yard lights and figurines may spread holiday cheer, they sparked 43% of all festive decoration disputes, according to a report from KeyLeads, a real estate platform that helps agents find new business.Nearly 10% of issues with homeowners associations involve property aesthetics, with seasonal decorations, driveways and fences frequently criticized, the report, based on the analysis of 2,500 Reddit posts and 200,000 comments, found.Homeowners' associations were formed to maintain property values and create "orderly, well-managed" communities. However, there is often homeowner frustration involved regarding stringent HOA requirements.As such, one in three online complaints focused on the restrictive and non-transparent nature of HOAs, while about 14% criticized how these associations handle neighbor conflicts.Condo residents report the highest number of HOA-related issues, accounting for nearly half of all complaints. About one in every three complaints criticizing community associations are lodged by those living in single-family homes.In contrast, townhouse residents are the least likely to encounter HOA problems, with one in five complaints being published on the web, KeyLead's report found.Homeowners complaining most frequently about HOAs are based in California, though less than 40% of residents live in properties managed by such associations.Florida residents were second in the volume of grievances against HOA's. The Sunshine State has the highest percentage of HOA residents nationwide. Meanwhile, North Carolina takes third place, accounting for one in twelve complaints being lodged by residents who live in HOA-managed properties, per the analysis.Cynthia Seifert, owner of KeyLeads, said prior to committing to living in a neighborhood with an HOA, homebuyers should review policies."For buyers, it's important to inquire about fees, common complaints, and rule enforcement," Seifert. "Investors, on the other hand, should evaluate whether the HOA's policies will support long-term property values and align with their investment goals."

Mortgage delinquencies continued to rise in November, and are now at their highest levels in almost three years, according to ICE Mortgage Technology.While many of the new late payments are a result of borrowers hurt by Hurricanes Helene and Milton, it is just another sign of distress starting to infiltrate the market."Delinquencies increased year over year in each of the last six months as the tides clearly turned to a modest shift higher," Andy Walden, ICE vice president of research and analysis, said in a statement on the First Look report. "They remain well below long-run averages but given the larger-than-expected rise in November, mortgage performance is worth watching closely as we enter 2025."November's total delinquency rate was 3.74%, an increase of 29 basis points or 8.38% from October's 3.45%. It is also a gain of 10.46% from November 2023's 3.39%.It is also the highest level of delinquencies since February 2022, when the rate was 3.94%.Besides the post-hurricane distress, ICE also pointed to a late-in-the-month Thanksgiving holiday that likely affected payment processing.Still, all stages of defaults rose during the month, with borrowers considered seriously delinquent — those 90 days or more past due on their payment but not yet in foreclosure — at the highest level since February 2023.The total number of properties where the borrower is 30 days or more late on their payment but not in foreclosure rose by 155,000 from October to over 2.02 million. The year-over-year increase was 224,000 homes.In comparison, between September and October, the 30-days or more late bucket fell by 11,000 properties.The elevated level is likely to be of short duration, however, as defaults related to natural disasters typically cure quickly as businesses reopen and people return to work. The government-sponsored enterprises grant a one-year forbearance for natural disasters, while the Federal Housing Administration just extended a foreclosure moratorium for loans it insures that are in areas affected by either of those storms.Of that total, 512,000 borrowers were 90-days or more delinquent, up 32,000 from October and 53,000 versus November 2023.But the pre-foreclosure inventory did shrink by 4,000 from the previous month to 185,000. That is 31,000 lower than one year ago.Prepayment speeds increased compared to the month prior, as the impact of higher mortgage rates was felt on refinance activity.Since the end of September, when the Federal Open Market Committee made the first of what now has become three rate cuts, the 30-year fixed rose 64 basis points according to Freddie Mac.That did not take into account the most recent FOMC reduction. Lender Price data on the National Mortgage News website had put the 30-year FRM at over 7% since the meeting.The benchmark 10-year Treasury peaked at 4.57% on the morning of Dec. 23, a gain of 18 basis points since the close on Dec. 16, the day before the latest rate cut was announced.That is likely to influence prepayment speeds in the coming months. 

Under President-elect Donald Trump, the government's conservatorship of Fannie Mae and Freddie Mac could become a thing of the past. The question is if the 30-year fixed rate mortgage would be, too.Earlier this month, Brian Brooks, former Comptroller of the Currency and current Trump transition advisor, said it was "highly likely" that the incoming government would move to privatize the mortgage market makers, noting that it was the "last piece of unfinished business" from the 2008 financial crisis.But some economists and lenders say such a move could have devastating consequences for the mortgage market. Specifically, they worry that if the government relinquishes its ownership stake in Fannie and Freddie, investors would no longer treat debt and securities issued by the entities as fully backstopped by the public. "We haven't had bank market mortgages in this country in 100 years," said R. Christopher Whalen, a risk analyst and former investment banker. "The only way you have 30-year mortgages with the current amortization that we have today is with government backing."Meanwhile, proponents of a swift end to conservatorship argue that little will change upon the release of the government-sponsored enterprises. Former Federal Housing Finance Agency Director Mark Calabria, who sought to end the conservatorship during the first Trump administration, pointed out that the government has never explicitly guaranteed the mortgage-backed securities, also known as MBS, issued by Fannie and Freddie. Still, he noted, market participants treated those assets as guaranteed both before and during the conservatorship. He predicts the same will be true once it ends."The implied guarantee is just created by marketing participants," Calabria said. "These very same people, post-conservatorship, will tell you that implied guarantee still exists."The American standardThe enterprises buy and guarantee principal and interest payments of mortgages that conform to certain standards. In doing so, they reduce risk for originators, expand the availability of credit and reduce costs faced by mortgage borrowers. Because their standards allow for 30-year fixed rate mortgages — a product scarcely offered elsewhere in the world — some economists and market participants credit them with enabling the structure to become ubiquitous among U.S. homeowners. "A true privatization is probably not in anyone's best interest at this point," said Stuart Boesky, founder and CEO of the real estate private equity group Pembrook Capital Management. "Unfortunately, we've grown to love fixed-rate, 30-year mortgages. Our whole housing market is built around it, and I'm not quite sure a real privatization would sustain a 30-year fixed rate mortgage."But Calabria said the enterprises are not the sole reason for this distinctly American home loan, arguing that they do nothing to mitigate the duration or interest rate risks that come with such long-dated instruments. That risk is assumed by MBS investors, including banks."The primary reason that we have longer term financing on mortgages than other countries is because we have less of a history of inflation," he said. "What's so special about a 30-year fixed mortgage? The interest rate risk. Are you going to make a 30-year fixed rate loan if it's an average of 10% inflation every year?"Ultimately, it's really an inflation question, not a credit question, because Fannie and Freddie do not guarantee interest rate risk. They guarantee credit risk," he added.Yet, such nuances could be lost once the process of privatization enters the public sphere. Whalen said he expects strong opposition to the move to arise on both sides of the political aisle."The moment they start this conversation, the moment the Secretary of the Treasury starts talking about this in front of Congress, the opposition is going to explode — not just from Democrats but Republicans, too," Whalen said. "They're going to start asking a lot of questions that they're not asking now."Getting into (and out of) conservatorshipFannie Mae, known formally as the Federal National Mortgage Association, was created by Congress during the Great Depression to bolster the secondary market for bank-originated mortgages and thus provide liquidity to lenders. The Federal Home Loan Mortgage Corp., or Freddie Mac, was created in 1970 to do the same for thrifts and smaller banks. Both entities were chartered as private companies but with government-appointed directors, lines of credit with the Treasury Department and certain benefits such as tax exempt statuses and the ability to classify their issuances as government securities. Fannie and Freddie have been under conservatorship with the FHFA since 2008, when losses from the subprime mortgage crisis pushed them to the brink of bankruptcy. The arrangement was intended to be a temporary stopgap to safeguard the mortgage market while the enterprises recapitalized. As part of the conservatorship, the Treasury Department owns preferred shares and warrants that could be converted into a 79.9% stake in the companies.To be released from conservatorship, the enterprises must build up a capital buffer of at least 3% of their assets, which currently total roughly $8 trillion. They also must raise enough equity through a public offering to repurchase preferred shares from the Treasury at a cost of roughly $190 billion. The total price tag of the public issuance could be offset by the enterprises retaining earnings over a several year period, but will also be influenced by the expected returns of investors. Some are skeptical about the feasibility of such a public offering, especially if the purchase would be taking on the risk of roughly half the U.S. mortgage market."I'm not quite sure there's enough capital in the capital market system to privatize it and, if there is, I'm not sure the return on equity is going to be attractive enough to draw in that capital," Boesky said. "It begs the question of whether it is possible to capitalize it the way it should be for it to be truly privatized."Calabria acknowledged that privatization would be no small feat, but argued that the process could be relatively simple. That's because the enterprises are not large holding companies, they are not structurally complex and they do not require organizational changes. He added that they would have the benefit of being included in index funds immediately simply because of their size.A recent report by the Congressional Budget Office noted that privatization is both possible and more viable today than it was when Calabria was in office. The CBO found that 60% of the 250 potential scenarios it analyzed this year would raise sufficient funds for privatization, compared to just 12% in 2020.A worthy tradeoff?Still, even if it can be done, some wonder whether it should, particularly given the unknown implications on mortgage costs and availability.Mark Zandi, chief economist with analytics firm Moody's, said there are a range of potential outcomes, including privatization with a government guarantee, either explicit or implicit; privatization without a guarantee; and a return to being government corporations, as Fannie was before 1968. Most of these options would increase mortgage costs at least slightly, Zandi said, adding that the most likely outcome is for the status quo to continue.Zandi noted that the enterprises have taken steps to shield taxpayers from losses by offloading the interest rate risk for their nonsecuritized holdings to the private sector in the form of credit risk transfers. With this pseudo-privatization in place and the mortgage industry functioning well, he sees no reason to take on the risks associated with privatization."It's a bad idea. I think it's a solution looking for a problem," Zandi said. "The housing finance system is functioning marvelously well and the housing finance ecosystem is in good shape. I mean, look at mortgage credit quality. It's about as good as it gets."Brooks, now the CEO of the nonbank commercial real estate lender Meridian Capital Group, argued that the move would allow the government-sponsored entities to buy more commercial mortgages and spark more competition in the real estate finance space. "In shareholder-owned structures at the agencies, you will draw much more capital into the real estate sector, generally, much more animal spirits, much more activity, and that is because those businesses themselves will be able to innovate," Brooks said onstage during a commercial real estate event. "People will build companies to try to compete with them. The amount of global capital flowing into the U.S. real estate sector generally, will go up, not down."For Calabria — who said he does not intend to join the new Trump administration next year — the issue is a matter of enforcing the law on the books, which directs the government to release the GSEs once they are stable enough to stand on their own."My argument is simply, as a basic principle, government should follow the law, whether we like it or not," he said. "Because Congress debated those trade offs and made the decision."