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62 | TH E M R EP O RT THE LATEST O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T How Will GSE Reform Affect Borrowers? Restructuring Fannie Mae and Freddie Mac could lead to higher interest rates, but probably not by much. A ccording to the Congressional Budget Office's (CBO) August 2018 update report ti - tled, "Transitioning to Alternative Structures for Housing Finance," mortgage interest rates are likely to go up, given the market struc - ture analyzed by the CBO. New structures aimed at the secondary market, primarily Fannie Mae and Freddie Mac, may lead to small increases in interest rates but not impact home prices. CBO also noted that even if restructuring the secondary mar - ket and the GSEs were to result in higher interest rates, the rise would still likely be smaller than typical yearly fluctuations in rates. The goal of restructuring would be to become more reliant on private capital than the secondary market, which is currently mostly controlled by the GSEs. Rising rates would be caused by smaller federal subsidies and firms charg - ing market prices for rates due to risk. Rising rates would inevitably result in rising home prices as well, but as previously mentioned, the rate rising level may not be enough to make a difference. According to CBO, mortgage interest rates would only rise mod - estly for two reasons: First, the current guarantee fees from Fannie Mae and Freddie Mac are not far off from the fees from private guarantors. Second, the impact of unlimited federal guarantees, instead of the current $254 billion limit in federal guarantee losses, could positively impact the liquid - ity of the secondary market, reduc- ing rates instead of raising them. The increased mortgage rates would slow the rate of home- value increases, according to the CBO. Additionally, restructur - ing may impact the availability of 30-year fixed-rate mortgages, depending mainly on the "ro- bustness" of the securitization market. However, the relatively high liquidity of the market from the unlimited federal guarantees would likely mean 30-year fixed- rate mortgages would still be widely available, with or without government backing. With a more privatized second - ary market, with the government acting as a last resort and not a primary investor, could also result in a lower number of investments in housing. The CBO noted overinvestment was one of the primary causes of the foreclosure crisis, and shifting capital from housing to other pursuits may strengthen the economy. SECONDARY MARKET Fannie Mae Posts Upward Revision to Economic Growth Forecast With an overall increase in its economic growth forecast, Fannie Mae pointed to housing as a drag on the economy. S ignaling more change in a positive direction, the Fannie Mae Economic and Strategic Research (ESR) Group recalibrated its full-year 2018 economic growth forecast to 3 percent—up from 2.8 percent in the previous report. The group based its revision on expectations that third- and fourth-quarter inventory restock - ing will offset ebbing consumer spending growth and a drop in net exports, so detailed its August 2018 Economic and Housing Outlook. Echoing previous reports, the ESR Group also pointed to trade policy as a primary source of downside risk. It maintained that loosening fiscal-policy impacts and tightening monetary policy are key parts of its 2.3 percent growth projection for 2019. "Breakneck headline growth in the second quarter disguised a detail largely responsible for the latest upward revision to our full-year growth forecast: a need to restock declining business inventories, which we expect will support greater growth amid weakness elsewhere," said Fannie Mae Chief Economist Doug Duncan. The sole sector throwing a wrench in the works? It's hous - ing, Duncan said. "Housing continues to drag on growth due to lackluster homebuilding activity, home sales, and brokers' commissions; and its overall weakness likely reflects continuing inventory shortages, rather than a decline in demand," he said. For the fourth time in five quarters, residential investment chipped away at growth as hous - ing activity lost steam across the board. Crimped supply contin- ued to support home-price hikes while helping block affordability, the ESR Group reported. In the face of recent evidence that consumers might have big - ger savings cushions to support future spending than formerly thought, the ESR Group also pre- dicts that real consumer spending growth will ease off in Q 3. As expected, government spending showed a strong increase in Q2, mirroring budget-related legisla - tion, it said. But outside of any new stimulus, spending's effect on growth should start waning in 2019, the group notes. Additionally, after last quarter's dash by international firms to "pull forward" U.S. imports in advance of previously announced tariffs, the ESR Group believes trade will return to its previ - ous status as an impediment on growth. This reflects both an about-face of last quarter's surge and the negative ramifications of the strengthening dollar, it explained.