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The Guardian
24-06-2025
- Business
- The Guardian
Interest-only mortgage could make comeback as regulator revisits rules
They were once called a 'ticking timebomb' but interest-only mortgages could become easier to get hold of as the Financial Conduct Authority (FCA) looks at ways to support home ownership. Interest-only mortgages were hugely popular but almost became extinct following the 2007-08 financial crisis, with some viewing them as one of the worst examples of irresponsible lending. But in a discussion paper on the future of the mortgage market, the FCA said it would like to hear views on 'whether our rules could better support more interest‑only mortgages'. It added: 'Interest‑only mortgages could be suitable for consumers who may struggle to afford a repayment mortgage and can support sustainable home ownership.' Its seemingly supportive words may suggest that, like 100% mortgages, which also largely disappeared after the financial crisis and are starting to pop up again, these contentious deals could be heading for a comeback. With a fully interest‑only mortgage, the borrower only pays the interest on their home loan, 'substantially reducing the contractual monthly payment and potentially making the mortgage more affordable', said the regulator. There are also so-called 'part and part' mortgages where a chunk of the loan is interest-only and the rest is on a repayment basis. One big problem with pre-financial crisis interest-only loans was that many were taken out without proof borrowers could pay off their debt. In 2009 the FCA's predecessor regulator officially labelled them as 'high-risk' and, in 2012, it called them a 'ticking timebomb'. The FCA now expects lenders to ensure there is a 'credible repayment strategy' for paying back the capital at the end of the mortgage term. Interest-only home loans are available – they made up 4.5% of regulated mortgage sales in 2024, compared with 39% in 2007 – though they are mainly used by buy-to-let landlords. They are also available as a niche product aimed at people in certain generally higher-earning professions such as barristers, accountants, investment bankers and vets. Sign up to Business Today Get set for the working day – we'll point you to all the business news and analysis you need every morning after newsletter promotion Despite their tainted image, many experts have maintained that these loans remain right for certain people and, only this week, a lender called Gen H announced the staged launch of a new interest-only offering. It said this type of deal 'can spell the difference between staying locked in the rental cycle or accessing home ownership and building meaningful wealth over time'. In its discussion paper, the FCA said: 'Interest‑only mortgages can be a flexible way for consumers to engage with the property market … We could, for example, explore circumstances in which borrowers could more easily shift between repayment and interest‑only during the mortgage term without having to set up a repayment vehicle.'
CNN
09-06-2025
- Business
- CNN
Hedge funds could make billions from a Fannie Mae and Freddie Mac spin-off
A long-held stake by a handful of hedge funds may finally yield returns under the Trump administration, but it risks sending shockwaves through America's $12 trillion mortgage market. Last month, President Donald Trump said he had plans to take mortgage financing giants Fannie Mae and Freddie Mac public. Such a move would end 17 years of federal government conservatorship over the two companies, which have played a central role in America's housing finance system by providing liquidity to the mortgage market. Some experts warn that severing Fannie and Freddie from government control could raise mortgage rates and restrict access to popular mortgage products — like the 30-year fixed loan — at a time when housing affordability remains out of reach for many Americans. Last week, Senate Democrats sent a letter to William Pulte, who leads the Federal Housing Finance Agency, asking him to pause efforts to take the two public, citing the risk that it could increase costs for homebuyers. A group of investors has been anxiously awaiting the day Fannie and Freddie return to the public markets. None has been more vocal than billionaire investor Bill Ackman, whose hedge fund, Pershing Square Capital, is one of the largest holders of common shares in Fannie and Freddie. 'We have been leading the charge on behalf of all (Fannie and Freddie) shareholders to help them to exit from conservatorship,' Ackman posted on social media on Tuesday. A representative for Ackman pointed to his commentary on social media when asked about Pershing Square's current stake. Ackman isn't the only hedge fund investor who bet on Fannie and Freddie after the government seized them during the 2008 financial crisis, when both were on the brink of collapse. Other investors, including billionaire hedge fund managers Carl Icahn and John Paulson, have previously disclosed stakes in Fannie and Freddie, though neither responded to CNN's request for information about the current size of their stakes. Taking the two mortgage giants public may be challenging, said Lori Goodman, a fellow at the Urban Institute, who has studied the history of Fannie Mae and Freddie Mac. Together, Fannie and Freddie's total net worth is more than $150 billion. Goodman estimates any public offering of Fannie and Freddie shares would likely eclipse the largest IPO in history: state-owned oil company Saudi Aramco, which raised $26 billion when it went public in 2019. 'This is an enormously complicated undertaking,' she said. Fannie and Freddie were never meant to permanently remain in a conservatorship arrangement, but Trump failed in an initial attempt to spin them off during his first administration. Investors are wagering that his next try will be successful. Shares of Fannie (FNMA) and Freddie (FMCC), which trade over the counter, surged after Trump was elected in November. In the last year, shares of Fannie's stock are up nearly 500% and Freddie's gained nearly 400%. Fannie and Freddie essentially grease the wheels of America's home lending market, one of the world's largest, by buying mortgages from lenders and repackaging them for investors. This helps enable a reliable flow of money to mortgage lenders, allowing them to offer more affordable rates to would-be homebuyers. Today, the mortgage giants guarantee more than half of America's mortgages, according to the FHFA. Goodman said she expects that any plan to take the companies public would lead to higher borrowing costs for homebuyers. The risk is that spinning off Fannie and Freddie could unsettle investors without the assurance of a government backstop, like the one provided during the 2008 crisis. In response, lenders might demand higher rates, especially from lower-income borrowers. 'You've got a trillion-dollar mortgage-backed securities market, both single-family and multi-family, that they're a critical part of,' Goodman said of Fannie and Freddie. 'You can't tamper with the government guarantee without upsetting that huge market.' Last month, Trump addressed the issue of the government's guarantee, writing on social media: 'I am working on TAKING THESE AMAZING COMPANIES PUBLIC, but I want to be clear, the U.S. Government will keep its implicit GUARANTEES, and I will stay strong in my position on overseeing them as President.' But a social media post might not be enough to assure investors in the multitrillion-dollar mortgage-backed securities market, Goodman said. It is possible that Fannie and Freddie could pay a fee to assure the government's guarantee long-term, but that cost would also likely be passed on to homebuyers, she added. Any rise in mortgage rates would likely be unwelcome news to prospective homebuyers, who have been grappling with elevated borrowing costs since the Federal Reserve hiked its benchmark interest rate in 2022 to combat inflation. Mortgage rates, which track the 10-year Treasury yield, have recently been climbing again as growing concerns about the national debt and Trump's tariff policy have fueled fears of an economic slowdown. Democrats have criticized the Trump administration's plans to overhaul Fannie and Freddie. Last week's letter to Pulte, the Federal Housing Finance Agency director, accused the Trump administration of being primarily motivated by 'rewarding President Trump's billionaire campaign contributors.' 'We have serious concerns that you plan to make significant changes to the Enterprises in a way that would put investor profits over the homes of millions of Americans,' Senate Democrats wrote in the letter. There is also the question of whether it makes sense to release Fannie and Freddie into the public market in their current form, said Norbert Michel, a director at the Cato Institute, a libertarian think tank. 'This system of privatized profit and socialized loss is what led to the 2008 crisis in the first place,' Michel said. 'Under no circumstances should they be released as they were prior.' 'That was a bad system. We should not have that system,' he added. It remains unclear what exactly the Trump administration plans to do with Fannie and Freddie, which means it's also unclear whether hedge fund stakes, such as Ackman's, are worth anything at all. That's because, as part of the conservatorship agreement, the US Treasury owns a preferential stake in Fannie and Freddie that takes priority over all other shareholders: Fannie and Freddie must pay back a $190 billion debt to the government for its bailout assistance before it can exit its conservatorship, which would prevent other shareholders from making a profit. Ackman has advocated for the removal of the government's preferred shares, arguing that Fannie and Freddie have already paid back more money than it cost to bail them out. Since entering conservatorship, the two companies have paid $301 billion in dividends to the Treasury. '(Fannie and Freddie) shareholders don't have their hands out. The opposite is the case,' Ackman wrote last week on social media. '(Fannie and Freddie) shareholders are simply seeking credit for payments that have already been made to the government so that a release from conservatorship can occur.' But financial analysts say investing in Fannie and Freddie is risky. 'At the moment, on an economic basis, the private shareholders' equity is about negative $200 billion, because that is what Fannie and Freddie owe the government,' said Bose George, a managing director at Keefe, Bruyette & Woods, a boutique investment banking company. 'Owning the shares is speculative because you're making an assumption that the government is going to forgive this debt.'
CNN
09-06-2025
- Business
- CNN
Hedge funds could make billions from a Fannie Mae and Freddie Mac spin-off
A long-held stake by a handful of hedge funds may finally yield returns under the Trump administration, but it risks sending shockwaves through America's $12 trillion mortgage market. Last month, President Donald Trump said he had plans to take mortgage financing giants Fannie Mae and Freddie Mac public. Such a move would end 17 years of federal government conservatorship over the two companies, which have played a central role in America's housing finance system by providing liquidity to the mortgage market. Some experts warn that severing Fannie and Freddie from government control could raise mortgage rates and restrict access to popular mortgage products — like the 30-year fixed loan — at a time when housing affordability remains out of reach for many Americans. Last week, Senate Democrats sent a letter to William Pulte, who leads the Federal Housing Finance Agency, asking him to pause efforts to take the two public, citing the risk that it could increase costs for homebuyers. A group of investors has been anxiously awaiting the day Fannie and Freddie return to the public markets. None has been more vocal than billionaire investor Bill Ackman, whose hedge fund, Pershing Square Capital, is one of the largest holders of common shares in Fannie and Freddie. 'We have been leading the charge on behalf of all (Fannie and Freddie) shareholders to help them to exit from conservatorship,' Ackman posted on social media on Tuesday. A representative for Ackman pointed to his commentary on social media when asked about Pershing Square's current stake. Ackman isn't the only hedge fund investor who bet on Fannie and Freddie after the government seized them during the 2008 financial crisis, when both were on the brink of collapse. Other investors, including billionaire hedge fund managers Carl Icahn and John Paulson, have previously disclosed stakes in Fannie and Freddie, though neither responded to CNN's request for information about the current size of their stakes. Taking the two mortgage giants public may be challenging, said Lori Goodman, a fellow at the Urban Institute, who has studied the history of Fannie Mae and Freddie Mac. Together, Fannie and Freddie's total net worth is more than $150 billion. Goodman estimates any public offering of Fannie and Freddie shares would likely eclipse the largest IPO in history: state-owned oil company Saudi Aramco, which raised $26 billion when it went public in 2019. 'This is an enormously complicated undertaking,' she said. Fannie and Freddie were never meant to permanently remain in a conservatorship arrangement, but Trump failed in an initial attempt to spin them off during his first administration. Investors are wagering that his next try will be successful. Shares of Fannie (FNMA) and Freddie (FMCC), which trade over the counter, surged after Trump was elected in November. In the last year, shares of Fannie's stock are up nearly 500% and Freddie's gained nearly 400%. Fannie and Freddie essentially grease the wheels of America's home lending market, one of the world's largest, by buying mortgages from lenders and repackaging them for investors. This helps enable a reliable flow of money to mortgage lenders, allowing them to offer more affordable rates to would-be homebuyers. Today, the mortgage giants guarantee more than half of America's mortgages, according to the FHFA. Goodman said she expects that any plan to take the companies public would lead to higher borrowing costs for homebuyers. The risk is that spinning off Fannie and Freddie could unsettle investors without the assurance of a government backstop, like the one provided during the 2008 crisis. In response, lenders might demand higher rates, especially from lower-income borrowers. 'You've got a trillion-dollar mortgage-backed securities market, both single-family and multi-family, that they're a critical part of,' Goodman said of Fannie and Freddie. 'You can't tamper with the government guarantee without upsetting that huge market.' Last month, Trump addressed the issue of the government's guarantee, writing on social media: 'I am working on TAKING THESE AMAZING COMPANIES PUBLIC, but I want to be clear, the U.S. Government will keep its implicit GUARANTEES, and I will stay strong in my position on overseeing them as President.' But a social media post might not be enough to assure investors in the multitrillion-dollar mortgage-backed securities market, Goodman said. It is possible that Fannie and Freddie could pay a fee to assure the government's guarantee long-term, but that cost would also likely be passed on to homebuyers, she added. Any rise in mortgage rates would likely be unwelcome news to prospective homebuyers, who have been grappling with elevated borrowing costs since the Federal Reserve hiked its benchmark interest rate in 2022 to combat inflation. Mortgage rates, which track the 10-year Treasury yield, have recently been climbing again as growing concerns about the national debt and Trump's tariff policy have fueled fears of an economic slowdown. Democrats have criticized the Trump administration's plans to overhaul Fannie and Freddie. Last week's letter to Pulte, the Federal Housing Finance Agency director, accused the Trump administration of being primarily motivated by 'rewarding President Trump's billionaire campaign contributors.' 'We have serious concerns that you plan to make significant changes to the Enterprises in a way that would put investor profits over the homes of millions of Americans,' Senate Democrats wrote in the letter. There is also the question of whether it makes sense to release Fannie and Freddie into the public market in their current form, said Norbert Michel, a director at the Cato Institute, a libertarian think tank. 'This system of privatized profit and socialized loss is what led to the 2008 crisis in the first place,' Michel said. 'Under no circumstances should they be released as they were prior.' 'That was a bad system. We should not have that system,' he added. It remains unclear what exactly the Trump administration plans to do with Fannie and Freddie, which means it's also unclear whether hedge fund stakes, such as Ackman's, are worth anything at all. That's because, as part of the conservatorship agreement, the US Treasury owns a preferential stake in Fannie and Freddie that takes priority over all other shareholders: Fannie and Freddie must pay back a $190 billion debt to the government for its bailout assistance before it can exit its conservatorship, which would prevent other shareholders from making a profit. Ackman has advocated for the removal of the government's preferred shares, arguing that Fannie and Freddie have already paid back more money than it cost to bail them out. Since entering conservatorship, the two companies have paid $301 billion in dividends to the Treasury. '(Fannie and Freddie) shareholders don't have their hands out. The opposite is the case,' Ackman wrote last week on social media. '(Fannie and Freddie) shareholders are simply seeking credit for payments that have already been made to the government so that a release from conservatorship can occur.' But financial analysts say investing in Fannie and Freddie is risky. 'At the moment, on an economic basis, the private shareholders' equity is about negative $200 billion, because that is what Fannie and Freddie owe the government,' said Bose George, a managing director at Keefe, Bruyette & Woods, a boutique investment banking company. 'Owning the shares is speculative because you're making an assumption that the government is going to forgive this debt.'
ABC News
14-05-2025
- Business
- ABC News
Lenders are cutting home loan rates ahead of expected RBA interest rate cut
Competition between lenders is heating up ahead of the Reserve Bank's board meeting next week. With economist forecasts and market pricing pointing to a 0.25 of a percentage point interest rate cut as a near-certainty next Tuesday, some mortgage borrowers may already have access to lower rates. Canstar's data insights director Sally Tindall says more than 24 lenders have cut their fixed rates in the past month. "We are now seeing fixed rates fall into the 4's … we typically see fixed rates start to come down ahead of an anticipated RBA rate cut," she said. The country's biggest bank, the Commonwealth Bank, grew its home loan book by more than 4 per cent in the first three months of this year. Last week, it cut its variable rate to 5.84 per cent to match rivals Westpac and ANZ. "The competition in the mortgage market is alive and kicking," says Ms Tindall. "We expect it to continue heating up. "There are 35 lenders on our database offering at least one variable rate under 5.75 per cent; you can actually do better than what the big banks are offering," said Ms Tindall. The official cash rate is currently sitting at 4.1 per cent. Most economists are predicting a quarter of a percentage point cut when the Reserve Bank meets next week, with NAB forecasting a double rate cut of half a percentage point. "If you look at the threat from the global trade situation, the down-trend in inflation and weak consumer spending — they point to rate cuts," AMP Shane Oliver chief economist says. If the RBA does cut interest rates by 0.25 of a percentage point and lenders pass it on in full to borrowers, this is how much you could save: Mouilk Naik is currently looking for the best variable interest rate on offer. His home loan is about to expire, after four years on a very low fixed rate of 1.99 per cent. "I feel very lucky that I have been on this low rate for such a long time," he says. "Coming out of the fixed rate and jumping on to the ranges of 6 per cent is uncertain and it makes you feel nervous." Repayments on his $470,000 mortgage will likely increase by about 50 per cent, so he's shopping around by speaking directly to his current lender, but also using a mortgage broker. "I would prefer to stay with my current bank as things are easy," he said. But his loyalty is by no means guaranteed. Canstar's Sally Tindall has run the numbers on whether fixed or variable rates end up being cheaper over the next two years, for a home owner with a $600,000 mortgage. Her calculations assume three cash rate cuts through to the end of 2025. The fixed rate option would cost a home owner only about $640 more in interest than if they had opted for the lowest variable rate. "It is a line ball call over the next two years about which option comes out cheaper in terms of fixed and variable," she notes. "Don't play the RBA crystal ball gazing game — take a step back, see what suits your finances and spend your time trying to find a competitive deal." Most economists are forecasting more rates to come in this cutting cycle. "For the remainder of the year we're expecting at least another cut in August, possibly another one in November and one more early next year in February," Dr Oliver says. "Ultimately, taking the official cash rate down to around 3.1-3.35 per cent." Among the major bank economics teams, ANZ expects the cash rate to hit 3.35 per cent by August, CBA is tipping it to reach the same level by the end of the year, as does Westpac. NAB is an outlier, expecting a double cut next week, plus cuts in July, August, November and February, to take it to 2.6 per cent.
