Trump Administration Eyes Move to Privatize Fannie, Freddie

Ladies and gentlemen, buckle up! The Trump administration is eyeing a massive move that could shake up the housing market like never before. They're talking about privatizing Fannie Mae and Freddie Mac, the two giants that underpin the nation’s $12 trillion mortgage market. This is a game-changer, folks, and you need to be ready for it!



Let's break it down. Fannie and Freddie have been under government control since the 2008 financial crisis. They buy mortgages from lenders and package them into mortgage-backed securities (MBS), providing liquidity and stability to the housing market. But now, the Trump administration is considering an executive order that could pave the way for privatizing these behemoths. This is a bold move, and it's got everyone talking.

The potential financial implications for investors are huge. For equity investors, the primary concern is the capital required for privatization. As of 2024, the combined net worth of Fannie and Freddie has increased to nearly $147 billion. However, the capital required to privatize the GSEs, including buffers, is estimated to be around $280 billion. At their current combined earnings rate of $20-25 billion per year, it would take five to seven years to organically grow their reserves to the levels required for privatization. An Initial Public Offering (IPO) could accelerate this process, but the required size would make it very challenging. Even if the GSEs waited two years to issue an IPO, they would need to raise approximately $75-80 billion of capital, which is 2.5 times more than the largest IPO ever (Saudi Aramco in 2019 at $29 billion). Additionally, the GSEs cannot go private without first addressing the Treasury’s preferred stock position, which is close to $340 billion. Forgiving this amount would be politically fraught, making privatization appear unlikely from a financial standpoint for equity investors.

For MBS investors, the primary concern is the government guarantee on agency MBS. Currently, investors in agency MBS benefit from the implicit backing of the government, which removes the need for investors to consider credit risk on MBS pools. In the event of privatization, an explicit government guarantee on MBS issued by Fannie and Freddie would be the simplest way to provide this backstop. However, pushing an explicit guarantee through Congress would be very difficult. A second option would be to model the current implicit situation together with a funding commitment from the Treasury, but this would also be challenging to push through Congress. The final option would be to take the GSEs private with no government guarantee, which is considered the worst and least likely option. This is because the launch of the Uniform Mortgage-Backed Security (UMBS) in 2019 allowed pools of Fannie and Freddie mortgages to be commingled and delivered together. Privatization would result in legal and operational hurdles in the case of a credit event where the GSEs had to absorb losses. Therefore, Fannie and Freddie would potentially need to merge to privatize, which adds another layer of complexity.

The impact on the broader housing market could be seismic. Mortgage rates could skyrocket, making it harder for homebuyers to afford their dream homes. The average 30-year fixed mortgage rate was 6.65% for the week ending on Thursday, according to Freddie Mac, which is already elevated compared to recent history. Any further increase could exacerbate affordability issues. This uncertainty could lead to a slowdown in housing transactions, as buyers and sellers become cautious about the future of the market. For instance, the shake-up at Fannie and Freddie by Bill Pulte, the new director of the Federal Housing Finance Agency (FHFA), has raised concerns about potential disruptions in the mortgage market.

But it's not all doom and gloom. Privatization could also bring about increased innovation and competition in the mortgage market. Private lenders might introduce new products and services that could benefit homebuyers. For example, proponents argue that "private lenders could bring innovation and competition, while critics fear that profitability would take precedence over affordability, leaving underserved markets behind." This could lead to a more dynamic and responsive mortgage market, but it also comes with the risk of increased volatility and potential for another financial crisis if lending standards are loosened.

So, what do you do? Stay tuned, folks! This is a story that's far from over. The Trump administration is exploring an executive order that could pave the way for privatizing Fannie Mae and Freddie Mac, and the stakes are higher than ever. Keep your eyes on the market, and be ready to act when the time comes. This is a no-brainer, folks! The future of the housing market is at stake, and you need to be ready for it!

Ask Aime: What are the implications of privatizing Fannie Mae and Freddie Mac on the housing market?