Fannie and Freddie Reboot With Overhaul Benefits Many Mortgage Players

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Fannie Mae and Freddie Mac could lie in wait on the way back to private hands. But with the current turn of events, some of the major players in the mortgage business may be in a better position.

Supreme Court ruling last week The fact that the government’s gains in the housing giants’ profits did not exceed the statutory powers of their regulators, and that presidents could easily change the main regulator, has dealt a blow or two to Fannie and Freddie, which have plunged more than 40% in the past week. … This means that the Biden administration can now appoint a new chief overseer, rather than retain power from the Trump administration, which has sought to free companies from government custody during its term.

But many stocks in broader mortgage sector actually traded higher. For them, the Fannie and Freddie overhaul under the previous administration wasn’t necessarily all that big for their economy.

Preparing government-sponsored businesses to raise capital from private investors included steps such as raising their capital requirements, but still needed to improve their profitability. For many in the sector, this was a recipe for higher fees and tighter access to guarantees. At one significant moment last year, news about increased duties due to the pandemic plummeted in the share price of the founders of mortgage loans.

Under President Biden, the GSE regulator may try to reverse some of these measures or implement other initiatives with the primary goal of making mortgages cheaper and more affordable. If GSEs were to lower fees or expand the types of borrowers or loans they repay, it could increase the size of the market for firms that create many so-called qualified mortgages – the type that GSEs buy – for example,

Rocket

Cos.,

UWM Holdings

UWMC -1.05%

or

credit

LDI 0.38%

Proponents of the previous administration’s approach might say that GSEs in their current state have narrowed or distorted the market, discouraging the growth of other types of mortgages. Some large banks might also see their share in the mortgage business increase thanks to less coverage of government-guaranteed loans, although they also benefited from the ability to cheaply remove credit risk.

Mortgage insurers such as

MGIC Investment

offer additional credit protection under GSE guarantees. They could benefit if the Biden administration takes additional action to help homeowners stave off default as the pandemic winds down, although credit risk has already been mitigated by the economic recovery, KBW analyst Bose George said. More volume going through the system will also be an incentive for insurers. Longer-term, more expensive, or limited guarantees from Fannie and Freddie could potentially expand the role of private mortgage insurance, though.

Any new direction for the GSE is unlikely to spark a new boom in mortgage-backed securities, as volumes are historically large enough. The creators, on the other hand, are faced with much more serious problems, such as rising rates, limited supply of houses and a decline in loan yields. According to Jefferies analyst Ryan Carr, investors also had little regard for Fannie and Freddie’s sweeping overhauls. In addition, Mr. Biden’s full plans for the companies remain unclear.

But in general, Fannie and Freddie’s reorientation of their policies to make their services cheaper or more welcome will be welcomed by many stocks in the mortgage sector, which already has quite a lot to do.

Write to Telis Demos in telis.demos@wsj.com

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