The end of Fannie and Freddie

Winding down these two mortgage organizations would be the biggest change to the U.S. financial system in half a century, and some banks are better positioned to succeed.

Jim Sinegal 14 May, 2015 | 5:00PM
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Mortgage origination, servicing and investment activities account for a significant portion of assets and revenue at U.S. banks, and residential mortgages dwarf all other consumer loan categories in the United States. Yet the mortgage market has been in limbo for more than five years, and government involvement is at an all-time high. Virtually no U.S. politicians, regulators or market participants are happy with Fannie Mae or Freddie Mac--now operating in conservatorship--but the two organizations dominate the mortgage industry.

Several proposals for reform are in progress, but each option is an experiment that would have uncertain outcomes for the U.S. economy and homeownership. Winding down Fannie and Freddie would be the biggest change to the financial system in half a century. Within five years, we expect that banks with scale and low-cost operations--such as  Wells Fargo (WFC),  U.S. Bancorp (USB), and  PNC Financial (PNC)--will dominate the industry at the expense of numerous middling players like  SunTrust (STI) and  Huntington Bancshares (HBAN).

The mortgage value chain

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Bank of America Corp47.57 USD1.58Rating
Huntington Bancshares Inc16.68 USD1.15Rating
JPMorgan Chase & Co171.78 USD1.35Rating
M&T Bank Corp159.88 USD0.08Rating
PNC Financial Services Group Inc216.08 USD1.57Rating
Regions Financial Corp24.09 USD3.48Rating
U.S. Bancorp62.74 USD0.90Rating
Wells Fargo & Co50.66 USD0.66Rating

About Author

Jim Sinegal

Jim Sinegal  Jim Sinegal is a senior equity analyst for Morningstar.

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