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House subcommittee to hear testimony supporting GSE wind down

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The U.S. mortgage market does not need Fannie Mae, Freddie Mac, nor a federal government guarantee on mortgage-backed securities, according to one industry expert set to testify before a House subcommittee Wednesday. Anthony Sanders is professor of real estate finance at George Mason University just outside the nation's capital in Northern Virginia. He is an adamant supporter of winding down the government-sponsored enterprises. In his testimony, released Tuesday, he claims very little will change if the mortgage giants disappear because the private market will fill that void. "Fannie and Freddie will not be missed, nor will their absence make a difference to the housing market or the economy, particularly if taxpayers are no longer on the hook for further losses," Sanders plans to tell the Financial Services Subcommittee on Capital Markets and GSEs Wednesday. Sanders will proffer seven options for one proposal to facilitate the transition of Fannie and Freddie from the most-dominant entities in the space — currently they own or back more than 90% of all mortgages — to bit players. But before reformation can take hold, Sanders said the government needs to picture what the mortgage landscape will look like without these companies. Rates would likely increase, Sanders claims, but would still remain at exceptionally low levels. "We are way below the historical average for mortgage rates," he said on Fox Business News Tuesday morning, adding that he expects a jump of 50 to 100 basis points in rates after Fannie and Freddie are phased out. "That still puts rates at well-below historical norms." Sanders also believes a market without Fannie and Freddie would produce a greater variety of mortgage products, something he feels would have a positive impact. Although some attest the 30-year fixed-rate mortgage is the crux of the mortgage market, Sanders says we don't need to rely on that type of mortgage solely. "The 30-year, fixed-rate mortgage exposes lenders and investors to interest-rate risk (along with default risk)," Sanders said in his prepared testimony. "Other countries have a greater mix of variable-rate, short-term fixed-rate, and medium-term fixed-rate mortgages, which provides their economies (and taxpayers) with less interest-rate exposure. If the United States had a greater variety of mortgages, it would have a more robust housing-finance system." Diversifying the mortgage market would not substantially reduce homeownership rates, Sanders says, which is against common consensus. The rate has bounced between 60% and 70% even with Fannie and Freddie around. Sanders provided the following chart in his testimony, comprised from data from the Census Bureau. (Click to expand) Eliminating the GSEs from the mortgage market would also promote safer lending and thereby safer investments for lenders, investors and mortgage insurers. This will indirectly attract new capital to the market and spur the private market, Sanders says. "In other words, not much will change in a world without Fannie Mae and Freddie Mac, other than saving taxpayers hundreds of billions of dollars in the future," his testimony concludes. Write to Christine Ricciardi. Follow her on Twitter @HWnewbieCR.

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