President Donald Trump's sweeping plan to shrink the government could have a very real impact on the housing market, particularly for lower- and middle-income buyers seeking mortgages. And it could make home buying either cheaper—or more expensive—depending on whom you ask.
On Thursday, the administration unveiled its long-anticipated government reorganization proposal. Among other things, the plan would privatize Fannie Mae and Freddie Mac, the two government-backed enterprises that help home buyers obtain mortgages. It would also limit Fannie and Freddie's role in the housing market and move their programs to assist low- and moderate-income buyers to the U.S. Department of Housing and Urban Development.
The administration argues that privatizing Fannie and Freddie would lead to more competition in the private sector—and ultimately lower prices. And moving housing affordability programs to HUD, the theory goes, would allow the government to better target the assistance it offers. But some experts claim the reverse is true: that mortgage rates will rise as a result of the privatization, and fewer available programs will instead make it harder for lower-income buyers to become homeowners.
The impact of these proposed changes on home buyers could be seismic. In 2017, about 70% of mortgages used to buy homes was backed by Fannie, Freddie, or Ginnie Mae, another federal entity.
Congress still must approve many of the proposals in the plan, which include combining the labor and education departments, restructuring the post office, and creating the Bureau of Economic Growth.
"This proposal would transform the way the Federal Government delivers support for the U.S. housing finance system to ensure more transparency and accountability to taxpayers, and to minimize the risk of taxpayer-funded bailouts, while maintaining responsible and sustainable support for homeowners," says the plan.
Fannie and Freddie don't make mortgage loans, but they make it easy for lenders to dole out the relatively inexpensive, 30-year fixed-rate mortgages popular with buyers. They do so by buying mortgages from lenders, bundling them into securities, and guaranteeing them to investors. This basically insures them.
The pair have been under government conservatorship since the housing bubble burst in 2008. The Fed bailed them out to the eventual tune of $187 billion. Over the past decade, many politicians and experts have advocated for removing them from conservatorship to shield taxpayers from footing yet another steep bill.
But critics say this move could make buying a home more expensive—not less.
“Practically everybody will have to pay higher mortgage after the privatization," says Andres Carbacho-Burgos, a senior economist focused on housing at Moody's Analytics. "The question is how much."
That's because without government backing, Fannie and Freddie will need to build up some cash to protect themselves against another housing bust. They'll also likely to need to eventually pay back that $187 billion the government used to stabilize them after the crash.
Now, if there is another housing crisis, the government will step in. But it would want to charge an unspecified fee to create an emergency fund if the unthinkable occurs again. While the plan claims it will reduce liability shouldered by taxpayers, those costs are likely to be passed on to those seeking mortgages.
A federal entity would also be charged with overseeing Fannie and Freddie going forward, but the proposal didn't specify which one.
In addition to taking over Fannie and Freddie's loan programs for low- and moderate-income buyers, HUD would also take over the U.S. Department of Agriculture's housing loan guarantee and rental assistance programs.
The plan boasts that these changes would allow more targeted subsidies to go to these aspiring homeowners as well as potentially toward affordable multifamily (building with five or more units) housing.
"If those government programs are well-funded, then low- and moderate-income buyers will be OK," says Chief Economist Danielle Hale of realtor.com®. "But the plan doesn’t say explicitly what’s going to happen to those funding levels.”
In addition, "it could be harder for folks on a tighter budget to get a mortgage because there will be fewer options and programs available to them," Carbacho-Burgos says.