← The David Greene Show
The David Greene Show
Mortgage Monday | Fannie and Freddie Potential Decoupling | Episode 100
00:24:59
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- [00:00]
A
What's going on, everyone? Welcome to Real Talk Real Estate. I'm joined today by Christian Bachelor for the Mortgage Monday episode. Christian, how are you today?
- [00:08]
B
Pretty good. Every week coming at you with fun new government stuff. It's a real fun time to be an American, isn't it? With our government that's not operational currently we're recording this during the shutdown, so we'll see what comes of all this craziness that's been in our headlines the last month or so.
- [00:24]
A
We have never had as much stuff to talk about as we have in the last year when it comes to macroeconomics. The federal government changes that are taking place with real estate, it is pretty crazy and today is no exception. So you and I are going to be talking about Fannie Mae and Freddie Mac possibly going public in an initial public offering. Before we get to the article we have for today's show, can you take a brief minute to just explain what Fannie Mae and Freddie Mac are, how they impact your ability to do mortgages and why they benefit the American public?
- [00:57]
B
Yeah, they're, they're, they're gscs. They're government sponsored enterprises which I know to our, to our average listener doesn't mean anything. They're basically the rule centers. That's how you can think about it. Right. They, they set the rules for what we in the industry call conforming lending. That includes conventional, that includes technically does include fha, but there's a similar, you know, Ginnie Mae for fha, but they, they basically set the guidelines that if X is met and X can include debt to income ratios, credit scores, you know, all the things that you usually hear us talking about, how to qualify if X criteria are met, we will ensure this product as a, not getting too complicated, but as, as an investment tool for an investor. Right. And we'll ensure the returns on that only if it meets our standards. Right. And those are the standards that Fannie Mae and Freddie Mac have been put in place to, to create.
- [01:52]
A
Right, Good point. So when you're originating loans for people, these are guidelines that you have to be aware of and familiar with so that you can underwrite the loan. Right?
- [02:02]
B
That's exactly right. Yeah. If it's a conventional loan.
- [02:04]
A
Right.
- [02:05]
B
But yes, anything that is conventional or conforming in nature will typically run through some form of Fannie Mae or Freddie Mac throughout its processing timeline. Okay.
- [02:15]
A
Now how does this benefit the American consumer getting a loan?
- [02:21]
B
Well, number one, America is one of the very few places on the face of the earth where you can put 5% down and buy a home and get something financed in the single digit interest rates.
- [02:30]
A
Right.
- [02:32]
B
So my answer is, you know, they're, they're government entities. Well, not technically they're government sponsored entities. Right. They're GSEs. But there are a lot of subsidies that the government gives. And in the conversation that we're about getting to today, we'll talk about, you know, are there pros and cons of that? But yeah, I mean all in all, the benefit is the ease of accessible financing that the American population receives. It is the structure of our financing. Right. 30 year fixed.
- [03:02]
A
Right.
- [03:04]
B
It is the efficiency in which it can take place. Right. You don't have to be a multimillionaire to get a loan. You don't have to have the net worth in your bank. You don't have to, you don't have to have experience. You could be a first time homebuyer and somebody will give you 95 or in the FHA's case, 96.5% of what you're buying, which is unheard of from like if there was just individuals writing these rules, they wouldn't allow that. It's not, it doesn't make sense. Right. But because these are, you know, propped up entities by the US Government that is very incentivized to make homeownership a reality. We are allowed to do these things.
- [03:41]
A
Right, Very good point. So that's what I was. My next question for you is have you ever heard of any lender ever that was not Fannie Mae or Freddie Mac sponsored doing 3 1/2% down, 3% down, 5% down on a house.
- [03:58]
B
Pre 2008 subprime lending. Yeah, not since 2008. And it's funny exactly what we're talking about. Like if individual investors started doing that, we saw pretty easily what happens. Right. Allowing people to qualify without strict requirements in place, putting whatever percentage they want to down led to the great financial crash of 2008. Like that's what, that's directly what it led to. Right. Which is why these things are very controlled and regulated and ultimately subsidized by the US government nowadays.
- [04:29]
A
Right.
- [04:31]
B
And we'll get into that more as we talk about this potential Ipoing of Fannie.
- [04:36]
A
I mean I said for years that people complain about rates being too high. It's like you don't understand. We live in America where we subsidize rates and we keep them artificially low. These are not market rate. These are insured market rate. Other countries don't have 30 year fixed rates. Nobody lends out their money for 30 years at a 3% rate and says, I'm just going to keep it that way the whole time. Nobody gives a loan with 3% down. They all want a much healthier down payment. Most other countries, countries that are in America, we usually require 50% down and you got to pay the money back in like three, four, five years sometimes. If you have a seven year loan in real estate in a lot of places, that's a long time. We do it a little bit differently in America and it's really good for the home buyers and I think we can take that for granted sometimes. And now there's talk that this may be going away. So Fannie and Freddie chief teases an initial public offering, which would mean it the company could be going private instead of being, I mean we're saying it's going public, but it's basically being taken away from the government and going out into the.
- [05:40]
B
Actual business now.
- [05:41]
A
Yeah, it's exactly right. A series of posts on social media, Pulte urged Americans to read up on the financial state of the two government sponsored enterprises, GSEs that he oversees with President Trump looking to release them to the market. President Trump made the right decision not to take Freddie and Fannie public during his first term and is opportunistically evaluating an offering this time around, which could be as early as the end of 2025. Combined, Freddie and Fannie have over 7 trillion of assets on their balance sheets. We are focused on running them like a business and taking out costs, so I don't think there's any limit to what they could be worth one day, he said in an earlier message. Pulte might be best known for his campaigns against Trump's perceived enemies, including New York Attorney General Letitia James, who is facing mortgage fraud charges based on documents surfaced by fhfa. By the way, guys, if you want to learn more about that, Christian, I did do a podcast episode about this released earlier, but Pulte is also in charge of the agency responsible for keeping tabs on Fannie and Freddie, who've been under government control since the 08 mortgage crisis. Fannie and Freddie purchased US home loans and packaged them into securities and I mean, would it be fair to say that the definition of a security is something sold on the stock market for most people's understanding?
- [06:55]
B
More or less, yeah. The stock market or the similar equivalent. Right, yeah. But yes, it's an investment vehicle for.
- [07:02]
A
Passive investing that's monitored by the federal government, the proceeds of which go into funding more Mortgages with the goal of making homeownership easy for Americans. So if you want me to put this into English for you. Fannie and Freddie buy the loan that we at the one brokerage originate for you, put a whole bunch of them together into a package, split them up into more or less stocks, and then you buy those stock, which gives Fannie and Freddie back money, which they then have to give to the next person that wants to buy a house. So if there's more money that they can lend and they know they can sell the loan to somebody easier, it kind of keeps the liquidity flowing in the market like oil in a vehicle, so that you don't run dry. While Trump had attempted to release Fannie and Freddie from federal control during his first term, the onset of COVID 19 pandemic foiled those plans. But Trump has teased letting Fannie and Freddie become publicly traded companies. And Pulte's latest tweets will only add to the intrigue. Now, I've got another article, but before I. But do you want to explain, Christian, like, the brief history of how Fannie and Freddie became involved with the federal government in the first place at the last financial crisis?
- [08:07]
B
Yeah. I mean, really, there was not stand. There were standards, but they weren't enforced standards. Right. It's like. It's like the speed limit on, you know, some highway in the middle of America. Like, they can put up signs that say, don't go over 70, but nobody's gonna listen to them because there's no enforcement.
- [08:22]
A
Right.
- [08:23]
B
That's kind of how it was prior to 2008. There were rules. Like, we wanted certain credit scores, we wanted certain ratios. But what they were finding is somebody would go to their mortgage broker, and there were not very great restrictions over what mortgage brokers could and could not do. So, you know, they would go over to their Xerox machine and they would add a couple zeros to the back of your income. And that sounds crazy, but that's what they would do. And they would show whatever underwriter they were sending a deal to that, my borrower makes 10,000amonth. No, he doesn't. He makes 100,000amonth. Right. And all of a sudden, your borrower qualified for whatever the hell he wants.
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A
Right.
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B
And they did the same thing with a number of ma. They did the same thing with bank statements. Right. They would add on zeros to the end of your bank account balance. And it wasn't just as simple as adding. This was like a lot of these were more like, you know, Higher level fraud. Right. More sophisticated. But mortgage brokers at that time, there was not caps and restrictions in place for their commission structures. So they could go crazy. Right? And if they went to Chase, who was operating without the fraud mindset, and they went to a mortgage broker who knew he could kind of play with these things and make seven points on somebody's loan, they would do it. Right? And he would do it at 0% down. So it basically led to a influx of these, what should have been qualified buyers, but in reality were not also taking advantage of the programs at the time that required 0% down payment. So we get a lot of these questions about our DSCR loan, like, oh, that's so risky. There's no income analysis. Funny for all you doubters out there, I got sent a video the other day of somebody clipping me and saying how cool. What Christian is saying is so dangerous. And they've made a whole big YouTube video about it. I loved it because he missed one very important thing. The default rate for DSCR loans over the last 24 months is about half of a percent lower than conventional counterparts. So people are, are defaulting on these risky loans at half the rate that people who are defaulting on their loans. They're actually fully under it now. The reason for that is that there's a down payment requirement. A certain person is capable of putting a 20% down payment. They're probably a little bit more financially established, things like that. Right?
- [10:36]
A
Well, they've also got more skin in the game. Obviously they're putting down 20%, not three.
- [10:39]
B
Exactly. Right. And they care a little bit about. More about the property performing. Right. They're going to put a little bit more work and attention in. Whereas if you could walk away from a 0% down payment and the only downside that you're getting is a hit to your credit, like if the worst of the worst happened, you lost your job, like that probably wouldn't be that big of a risk factor for you. Like, oh, I got to hit, take a hit to my credit for five years. Who cares? Like, I'm going to walk away from this and not have to spend $50,000 that I don't have. Whereas somebody who's walking away from a $100,000 down payment, that's a different story.
- [11:09]
A
Right? Yeah, very good point.
- [11:11]
B
Regardless, though, getting back to what your actual question was, these GSEs were established to not only refine the rule set, but you also refined the verification of the rules. So that's what I referred to on the the highway as the enforcement, they were paid to go put the, the signs on the road, but they were also paid to be the police managing that they were being followed. Right. That's what makes lending so difficult nowadays. It was never just like the rules are hard to follow. It's that the detail that an underwriter requires you to go into to clear what you think is a very easy thing. For instance, when you give us a bank statement, it has to actually be an acceptable form with your bank like little, it's your bank verified URL on it. It can't just be a picture or a screenshot of your bank. We deal with this all the time. And borrowers, you can see my balance statement. You can see the number. You can see the number. And like you're not wrong. But you could have photoshopped it.
- [12:09]
A
And Fannie Mae has a role in place to prevent that from happening because.
- [12:12]
B
People photoshopped it for 10 years. Right. So it's the enforcement that is hard. That's what Fannie Mae really was, was enacted to create the or to solve the problem of was the enforcement of the rules, not necessarily the rules.
- [12:28]
A
Okay, good stuff. It also because now there's some stability in this even though there's a bigger pain in the butt. It allows loans, it allows money to be able to flow more freely because you can sell the loans much easier because the person buying it has confidence that what they're buying has been underwritten very well versus the wild wild west where if you're buying a loan from someone, this is what was happening during the last financial crisis, the Great Reset or whatever, the Great Depression. You could take a bunch of crap loans and shove them in with some good ones and you could get a good credit rating if you hit the balance right and people didn't know what they were buying. Well if you no one's buying these things as securities in the stock market, then money's not flowing back into lenders to lend out and then people are going to have a very difficult time buying properties. All right, next article we have here comes from MPA mag. The Fannie and Freddie IPO could happen in early 2026 according to Pulte. An independent public offering from the government sponsored enterprises. Fannie Mae and Freddie Mac could happen in early 2026 according to a social media post by the director of Federal Housing. Responding to an ex post quoting a Mortgage Professional America report about the potential timing of a fetty Fannie Freddie IPO Bill Pulte announced Thursday that an offering early next year was possible but that it could hinge on President Trump's decision. I said as early as late 2025, but could be Q1 or Q2, 2026. We shall see. Is it up to President what? Anything. President Trump made the right decision not to take Fannie and Freddie public during his first term, is opportunistically evaluating its offering this time around, which could be as early as the end of 2025. It was Pulte's original quote. The entire mortgage industry, including us, is watching closely to see what, if anything, will happen with Fannie and Freddie. Bob Brokesmith, president and CEO of the Mortgage Bankers association, told the assembled brokers at the organization's annual event in Las Vegas this week that they will be in Washington to give their input. The Trump administration is weighing the future of the GSEs and NBA is intimately involved in the discussion we've had. We've already had multiple meetings with the FHFA and the Treasury. We don't have. We don't just have a seat at the table. We're near the head of the table. We're speaking loud and clear. He emphasized that any changes must be made in a measured fashion to avoid turmoil in the mortgage market. Our impact is evident in the tone that senior officials are now taking, he said. They've said that any reform will be, and I quote, informed, careful and calibrated. They've also made clear that mortgage credit won't get more expensive and that they're pushing hard to bring costs home. These are goals we fully share and rest assured the NBA won't rest until GSC release is done. Right. All right, Christian, let's talk a little bit about what would happen if this goes down. Now, you and I don't have a crystal ball, but we're going to speculate here in either direction how this would affect borrowers. So let's start at a high level. If Fannie and Freddie are no longer overseen by the federal government and loans are completely privatized to where lenders just give you the loan that they want to give you and you have to pick which one you want, there's no longer a standardized format like what we're used to. What are some things that you think of would hit the market and disrupt it?
- [15:42]
B
A lot of things. Number one, if it went private, first and foremost, they would become a for profit business. In my world, that means rates go up. They're looking for a higher rate of return that would actually be based on supply and demand, not government subsidies. Now, if they work this out, where it goes Privatized, but it's still subsidized by the American government. Maybe. But now we're getting into starts to sound a little bit like China and communism with the government owning a small percentage of all the businesses in the country. Like I just don't. I've never liked that idea. But now with the government taking, you know, national stock in like Nvidia or I am, whatever, they forgot the other one, the other chip provider, that's happening in real time. And I think people should be more aware of what's happening. The US American government is taking ownership in private companies. That's like all the things that I remember growing up hearing that like China did that. Like the America should never do. Like the government owns the bakery on the side of the corner.
- [16:52]
A
Like that's where you end up talking like me. We will be doing podcast. Welcome to the David Green United Socialist Republic.
- [17:01]
B
A little bit. That's what I'm getting right, Is that like the government's baking your bread now? Do you want the government baking your bread right now? Right now, Fannie Mae is fully government subsidized, but it's not a private company. It's not run for profit. Right. So if this happens, number one, I think cost of mortgages will go up. However, I think there will be an impact on the other side of the equation as well. When individuals with profit in mind run the mortgage company, bad things happen. It just happens when individuals who are solely focused on maxing out the profitability of mortgages. You have 2008 happen, you have restrictions relaxed, you have guidelines taken away and you allow more access to financing, which is very good for a three year period for buyers and, and then it crashes because a bunch of people who shouldn't get loans did. That's what happens when individuals are in control of, of of loan guidelines and not a regulated subsidized government agency that specifically puts people in place that do not profit off of those loans.
- [18:05]
A
Right. Well, hang on a second. It sounds like you're kind of making the segment on both sides. Maybe we need to clarify this. Yeah, it sounds like you're saying we don't want the government involved in business, but the government is involved in loans and that's a good thing.
- [18:16]
B
And you private for profit businesses. Okay, that's what I'm getting at. So right now it's not a private for profit business. Fannie Mae is not operating with the primary goal be to generate income. If it goes there, you get all the things from the side of what for profit businesses Elicit, which is maxing out profits, increasing rates, relaxing guidelines. A lot of danger there. But you also have, hey, okay, how we fix that is potentially the government coming in and owning a stake in it as well to prop up what we don't do. Right? And I don't love that. If we keep it where it is, the for profit conversation goes away.
- [18:54]
A
So that keeps rates lower.
- [18:55]
B
We have a person in charge of Fannie Mae that does not profit based on Fannie Mae relaxing or straightening guidelines. Their only goal is to operate unbiased and make sure that the mortgage market doesn't collapse. That's what it is. Right now I worry about where it would go if that breaks down.
- [19:14]
A
Okay, if it does, here's a thought. What if they go public, which is also going private? I realize how confused that is. They put out an initial public offering which is going private and then it all goes to crap and people start saying, hey, we'll give you a no down payment loan, come to us instead of somebody else. But you're going to get a 9% rate. But your first two years you're going to be at a 1% interest rate and you start seeing these wacky products come out. Like this is literally what led to them becoming privatized. Is it turned in the Wild west and all these subprime mortgages were given and people did not understand what they were signing up for and they got bad loans. But the lender thought, hey, this is how the whole thing worked. If people are wondering how the loan industry fell apart at a very high level view, I give a loan that I know is BS and I market it to you like it's not. So, hey, your interest rate is going to be zero percent.
- [20:06]
B
What?
- [20:07]
A
That's crazy. Yep. And in the fine print it says until three years go by and then your interest rate becomes 18%. And they're trusting you're not going to read that. So you get the loan. Now they know you're never going to be able to pay this thing back when it goes to 18%. So normally people want to give a loan like that, but they're going to sell it to somebody else. Now that person, why would they buy it? Because they know they're going to sell it to somebody else. And everybody passes this thing down the line until it ends up in a mortgage backed security where your mom buys it as part of her 401k package, not understanding what she's buying because she's not a financial expert. And this is how the bank screwed America over. This is what they did. And that's why at the end of the day, when all the loans defaulted, it was the stock market and people's retirements that took a hit, not the banks. They gave all these crappy loans. So we married the government to the lending world to stop that. Because they have, like you said, Chris, in the enforcement ability, they got the stick and they can come smack you with it if they think that you're doing things wrong. Now, is there a downside to that? Of course, depending on who's president, they can influence things negatively or screw things up. And the government is very good at screwing things up. On the other side, there is a positive to it. If they're doing a good job and they're keeping regulation, they're stopping predatory lending practices. So what you'll probably see from my perspective is a whole bunch of shady people that market really good and sell you crappy loans that are going to burn you and a handful of really good people that you only get connected with if you know someone who knows the difference between good and bad. If I end up being right about my picture here, would you agree that the right mortgage broker becomes even more important than what it is right now because your ability to get ripped off exponentially increases.
- [21:52]
B
Yeah. 100. And just for like integrity of the industry.
- [21:55]
A
Right.
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B
I mean, if Fannie Mae is not going to require integrity, like, who's going to uphold it? And like, the bad answer is we're going to have a bunch of bad brokers that, you know, probably the same thing that happened 2008 would happen.
- [22:05]
A
Yeah.
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B
But that's why I'm hoping we learn because, I mean, none of this is set, like, we're totally really theorizing here, guys. Right. For all the listeners. That's why I'm saying, like, you know, a little bit on this side, a little bit like all of this is not real yet. We're just discussing that if it does. I think so much of that responsibility for upholding the integrity entry is going to fall on the individuals.
- [22:26]
A
Yes.
- [22:27]
B
And not the overall structure. And I think that's dangerous because whenever you rely on individuals, individuals are going to be out for their best interest.
- [22:35]
A
Which is usually not your best interest.
- [22:37]
B
That's exactly right. Right.
- [22:39]
A
Yeah. It's like taking away law enforcement. Do you think everyone's just going all. It becomes the purge when you just take away any form of consequences and fear.
- [22:46]
B
But just govern yourself, David.
- [22:47]
A
Govern yourself.
- [22:49]
B
Right. Of course that's not going to work. Right.
- [22:52]
A
You know, you get China when you do that because it all goes into chaos and then the government steps in in the chaos and says hey, we'll fix it. We're going to buy all of your businesses and now you get a communistic country where they control everything because and you turned over all the power to them because you needed help, because you had chaos. So we are hoping that is not what happens. That is the worst case scenario or one of the wor or scenarios that we could deal with. Hopefully the way if they do separate they still put laws in place and an effective way to govern and we don't see future presidents come in and screw the thing up. But let's all just be grateful in the meantime for what we've got. Sometimes you're like hey man, I'm coveting my neighbor's wife. But your own wife is better. Dance with the one that brought you Any last minute words, Christian, before we let you get out of here.
- [23:38]
B
I don't know how to follow that up.
- [23:40]
A
Yeah, well how about if we just tell people where they can go if they want to talk to you more.
- [23:44]
B
Yeah guys, as always you can find us at the1brokerage.com that's where you can find out about what products and services that we offer. You can respond to the YouTube video down here below in the comments or on wherever you're listening. And if you're ever trying to get me might be found on Instagram @the1 broker is my handle. And David, where can they find you?
- [24:01]
A
You can find me at davidgreen24.com and use the chat feature and get in touch with me directly. You can also go follow me on Instagram and let me know what you think about my content@David Green24 or you can find me on your favorite social media at the same. You can also make sure you subscribe to podcast and get three episodes a week. Mortgage Monday, Real Talk, Realtor and the David Green show where I would have Christian even more if I could but all the other guests complained that he was more handsome and he made him look bad. Well Christian, thanks for being here today and thanks for sharing your expertise and thanks for all the work that you're doing in the industry to try to keep people safe and serve our clients well. Guys, if you have a rate at 7% or above, you need to reach out to us and let us look into refinancing this thing for you. We would love to save you some money and we also would love to work with you or any realtors that you know that are looking to buy or sell houses. Let us know in the comments what you think and if you're worried about this and remember to go appreciate your spouse. This is David Green for Christian, the handsome man Bachelder signing off.