Where Trump and Biden Stand on Mortgage Finance

This article is part of a Wall Street Journal guide comparing President Trump and former

This article is part of a Wall Street Journal guide comparing President Trump and former Vice President Joe Biden on issues from climate change to health care and jobs.

WASHINGTON—Donald Trump and Joe Biden have divergent views on the federal government’s role in the $11 trillion mortgage market, with potential consequences for the price of home loans for millions of Americans.

In keeping with the Republican Party’s emphasis on limiting the government’s role in the economy, the Trump administration aims to return two giant mortgage-finance companies—

Fannie Mae

and

Freddie Mac

—to private hands over the next couple of years.

A Biden administration, in contrast, would be in no hurry to release the companies, which the government has controlled since 2008. Instead, the Democratic former vice president would focus on ways to use the companies to boost housing affordability and promote homeownership.

Here is a look at the competing policies and what either approach might mean for housing-market consumers.

What’s at stake for borrowers?

Mortgage affordability could be affected. The Biden camp argues that the Trump administration’s approach would bring higher mortgage rates. Republicans say the government should play a smaller role backstopping the mortgage market, and that any increase in rates would be minimal.

What are Fannie and Freddie?

The U.S. government created the mortgage finance companies to promote affordable homeownership. President Franklin D. Roosevelt created Fannie Mae in 1938 to help provide money for home mortgages and spur housing construction. Freddie was created in 1970 to cater to smaller lenders.

Fannie and Freddie don’t lend money directly to home buyers. Instead, they buy mortgages from lenders, repackage them into securities and sell those securities to investors.

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The arrangement has advantages for lenders because selling home-loans to Fannie and Freddie gives them cash that they can then use to make fresh loans. That makes more money available for homeowners to borrow.

Investors also like the arrangement because they are protected against losses by Fannie and Freddie’s guarantee and the mortgage giants are themselves backstopped by the Treasury Department. That makes the companies’ securities ultrasafe. As a result, interest rates on the securities—and the underlying mortgages—are lower than they otherwise would be.

Homeowners benefit because Fannie and Freddie’s role as guarantors of about half the country’s mortgages makes it possible for lenders to offer home loans for 30 years at fixed rates of interest—something that exists in few other countries. But that benefit also brings risks, as the 2008 financial crisis showed.

What happened during the financial crisis?

In 2008, this seemingly safe arrangement came crashing down. In the run-up to the crisis, Fannie and Freddie took on increasingly risky investments, primarily to compete with Wall Street firms and later because lawmakers wanted them to support a weakening housing market.

The government assumed control through a process known as conservatorship, fearing that the mortgage giants’ collapse could trigger a broader meltdown of the housing market. The government eventually pumped about $200 billion into the companies and have promised to provide another $254 billion if needed.

Figuring out how to refashion the companies remains the largest single piece of unfinished business from the 2008 financial crisis. Repeated efforts to revamp housing finance have sputtered in Congress, including efforts backed by the Obama administration, when Mr. Biden served as vice president.

What are the Trump administration’s plans?

The administration says it would put Fannie Mae and Freddie Mac on a more stable financial footing by returning them to private hands after imposing new limits on their business activities and raising the fees they charge lenders. Its privatization plan doesn’t rely on legislation from Congress.

A key first step would be to increase the amount of capital the mortgage companies must hold to absorb potential losses, through a combination of retained earnings and stock sales. Trump-appointed policy makers say the companies’ capital levels should be on par with those of big U.S. banks. That could mean holding $240 billion between them, versus the roughly $30 billion they hold today.

“My job and my statutory mission is to make sure that the enterprises never again fail the millions of families whose financial futures depend on a stable mortgage market,” Mark Calabria, the companies’ independent federal regulator, said in testimony last month before a House committee. “To do this, they must build capital.”

The companies would pay the U.S. government a fee for its continued line of credit from the Treasury. They might also be forbidden from buying some types of loans considered riskier, such as second mortgages and loans for investment properties.

Republicans say that mortgage rates might rise modestly but that pricing would more closely reflect the risk of a mortgage. And they argue taxpayers would benefit because the risk of another bailout would be reduced.

What would a Biden administration do?

Democrats have no immediate plans to return the companies to private ownership, and they say the Trump administration’s proposal would significantly boost the cost of mortgages for millions of American home-buyers.

“The idea that you can dramatically increase capital and significantly shrink their footprint in the system without impacting the cost of a mortgage is an economic fantasy,” said Jim Parrott, a former Obama administration housing adviser who is now an industry consultant.

Jared Bernstein, a former chief economist to Mr. Biden, said the candidate is committed “to broad, affordable access to long-term, fixed-rate lending” and would ensure that Fannie and Freddie achieve those goals.

The Biden campaign says it would expand on the companies’ existing work on affordable housing. The one explicit mention of Fannie and Freddie in a Biden housing-policy blueprint calls for boosting a government-run affordable-housing trust fund by $20 billion, by increasing assessments charged by the mortgage giants.

Write to Andrew Ackerman at andrew.ackerman@wsj.com

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