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The End of Fannie and Freddie

Winding down Fannie and Freddie would be the biggest change to the financial system in half a century, and some banks are better positioned to succeed.

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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. Yet the mortgage market has been in limbo for more than five years, and government involvement is at an all-time high. Virtually no 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).

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Jim Sinegal does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.