According to the Wall Street Journal, private investors are getting into non-conforming loans, a market once the exclusive domain for Fannie Mae and Freddie Mac. (Non-conforming loans fail to meet bank criteria for funding, according to Wikipedia. “ Reasons include the loan amount is higher than the conforming loan limit, lack of sufficient credit, the unorthodox nature of the use of funds or the collateral backing it”).

Private banks and financial institutions are pooling these non-conforming loans into bonds and then selling these bonds to investors without government backing…the kind of government backing that Government Secured Entities (GSEs) Fannie Mae and Freddie Mac have offered as a matter of course.

Why are private banks, financial institutions and investors willing to involve themselves with non-secured bonds? The potential of greater returns.

According to the WSJ, “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, let (banks) offer better bids than the (GSE) agencies.”

In both 2018 and 2017, the number of private-label securities issued was three times the number issued in 2016. The WSJ called this tripling of private-label securities “…a consequential sign of changing dynamics…” within the housing market. Essentially this shift to privatization removes Fannie Mae and Freddie Mac as middleman in exchange for the possibility of greater profits.

The WSJ said, “If this latest activity is the start of a bigger shift (from GSEs to private lenders), the Fannie Mae and Freddie Mac’s role in housing finance could shrink due to market forces rather than congressional action.” (Congress has, for several years, been discussing “phasing out” and privatizing Fannie Mae and Freddie Mac.)

Private firms involved with non-conforming loans include JP Morgan Chase, Flagstar Bancorp, Chimera Investment and the Redwood Trust.

Mark Zandi, Moody’s Chief Economist, sees this shift to privatizing non-conforming loans as a “significant shift” within financing the housing market. Zandi said to the WSJ, “It’s happening and it’s consequential.”