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Is Fannie, Freddie’s role in the housing market beginning to shrink?

A growing number of non-conforming loans are flowing to the private market as investors get in on the game

Private investors are buying non-conforming mortgage loans – which are usually the domain of Fannie Mae and Freddie Mac – at a growing rate.

According to a recent article in The Wall Street Journal, the number of loans that meet Fannie and Freddie standards for purchase are instead flowing to the private market. Banks and financial institutions are pooling them into bonds and selling them to investors without government backing, the WSJ said, calling it a consequential sign of changing dynamics.

Firms including Chimera Investment, Redwood Trust, JPMorgan Chase and Flagstar Bancorp are issuing these private-label securities, removing Fannie and Freddie as the middleman and assuming some of the risk on their own in exchange for a chance at greater profits.

“In the last year or so, investors have proven increasingly willing to forgo the government backstop and buy private mortgage bonds, indicating they have grown more comfortable taking risk for more potential return,” the article stated. “The fact that more investors want to buy these securities means banks and other firms can package these deals more profitably, which in some cases lets them offer better bids than the agencies.”

While the number of loans securitized by private investors is miniscule compared with the overall market, the WSJ said it is growing, with the number of private-label securities issued in both 2018 and 2017 almost triple 2016’s total.

Prior to the financial crisis, the private market was much more robust than it is today, and efforts to jumpstart it now that the housing market has recovered have largely failed. The WSJ said this trend could signal a change.

“If the latest activity is the start of a bigger shift, then Fannie and Freddie’s role in housing finance could shrink through market forces rather than congressional action,” the article stated.

Moody’s Chief Economist Mark Zandi told the WSJ that the development is a sign shift.

“In effect, this effort to reduce the footprint is well under way,” said Zandi. “It’s happening and it is consequential.”

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