It has been reported that Congress is considering dealing with the mess of Fannie Mae and Freddie Mac by simply abolishing them. No privatization. No permanent nationalization. Certainly no return to hybridization. Instead, a neat and tidy sweeping into the dust-bin. While other columnists are busying themselves focusing on the complete set of ramifications, here, we’re mainly interested in the potential impact on reverse mortgages.

For whatever reason, Fannie (rather than Freddie, in this case) came to dominate the market for reverse mortgages. At its peak in 2008, it accounted for 90% of the funding of all HECM loans (the FHA-mandated reverse mortgage standard) which it purchased in securitized blocks – the reverse mortgage equivalent of the mortgage-backed securities (MBS) that have gained much notoriety for their role in fomenting the credit crisis. This market share has since shrunk to 10%, however, with most of the slack picked up by its competitor, Ginnie Mae.

Given that the reverse mortgage industry has continued to function (quite smoothly, in fact) in the absence of Fannie Mae, then, it seems that its complete disappearance from the scene shouldn’t matter too much. On the surface, this is probably true, but only because reverse mortgage originations remain small, as a fraction of overall mortgage lending activity. Thus, the industry’s capital needs can easily be met by one of the various mortgage giants (Fannie, Freddie, Ginnie, etc.) and a handful of other institutional investors.

The danger is that the reverse mortgage market is basically a monopsony (only one buyer, the reverse of a monopoly); as long as that buyer remains willing, everything is fine. When that buyer gets full and/or changes its mind, well, other buyers must be found. In this case, it would be difficult to find a buyer with the same capacity as Ginnie Mae.

If the industry continues to grow as fast as many experts expect (and lenders hope), however, lenders will probably have to find other sources of capital. Institutional investors are returning to mortgage-backed securities, but in small numbers and very cautiously. If Ginnie Mae cuts back on its purchases and/or reverse mortgage lending activity outpaces Ginnie’s ability to buy securitized HECM mortgages, lenders could be forced to raise interest rates, lower borrowing limits, and impose any number of other limitations on new loans in order to make them attractive for private investors.

In addition, while Fannie Mae’s overall market share of reverse mortgage lending has shrunk, its share of variable-rate mortgage remains sizeable. Given that most reverse mortgage borrowers prefer the fixed-rate version, this isn’t currently a problem. If Fannie were to disappear, variable-rate reverse mortgage lending would probably trickle to a halt. That could make it difficult for borrowers to select the line-of-credit payment option, and would instead have to opt for monthly payments and/or lump sum payment.