Possibility Of Privatizing Fannie, Freddie Raises Questions About The Future Of Crucial Mortgage Guarantee

President-elect Donald Trump’s return to the White House has reignited speculation about the privatization of Fannie Mae and Freddie Mac, an effort he proposed during his first term.

As the housing sector waits for details of a plan to emerge, economists, bankers and brokers are keenly interested to see whether the federal government's guarantee on mortgage-backed securities will survive any reform. 

A product of the Global Financial Crisis, the government's support of the sector has become its defining feature and a facet of the system that would have widespread impacts on multifamily lending if dropped.

“No matter what structure they come up with that they call privatization, the government is going to have to be heavily involved with its balance sheet as a backstop,” said Stuart Boesky, founder and CEO of New York-based multifamily lender Pembrook Capital Management. “Otherwise, our whole system of financing will drastically change.”

Since the mortgage market collapse and subsequent Great Recession, Fannie Mae and Freddie Mac have been under federal oversight. The government sets the rules, but it also guarantees that the mortgage-backed securities being sold will never default in a process called conservatorship.  

Fannie Mae and Freddie Mac are by far the most active participants in the $11T mortgage-backed securities market, with $310B in average daily trading volume as of November, according to trader-broker trade organization Sifma. 

Trump’s allies have been preparing to relaunch privatization efforts since before his election night victory, and Republicans have for years chafed at the conservatorship program. 

“Markets expect — maybe not immediately, but over the course of the second Trump administration — much more of an effort to release them from conservatorship,” said Mike Fratantoni, senior vice president and chief economist at the Mortgage Bankers Association. “From a market participant's perspective, it's really a question of, what does that look like?” 

In a 2018 proposal, the Trump administration promised to make Fannie Mae and Freddie Mac “fully private entities,” HousingWire reported at the time. The plans fizzled after Joe Biden’s victory in the 2020 race for the White House, but Trump’s win last month has once again shifted the calculation. 

“With the [2024] election, it went from unlikely to possible,” Fratantoni said. 

The stock prices of Fannie Mae and Freddie Mac have more than doubled since Donald Trump won a second term in the White House on Nov. 5, an indication that investors feel privatization is likely.

Fannie Mae and Freddie Mac exist by charter to ensure the supply of capital in mortgage markets and to promote affordable housing development. The agencies don’t directly underwrite any mortgages, instead purchasing loans from other firms before packaging the debt and selling it into a secondary market. 

The mortgage guarantee limits investor exposure, reducing their overall risk and increasing the security asset’s value. While key in the multifamily commercial real estate space, the federal guarantee is also the key reason for the success of the 30-year fixed-rate mortgages that underpin the U.S. housing market, a uniquely American creation made possible because the government assumes some of the long-term risk. 

Any significant change to the securities market would create volatility in the housing market and could upend the Federal Reserve’s attempt to avoid a recession while taming inflation. 

Mortgage Bankers Association CEO Bob Broeksmit wrote in a blog post last week that his organization wanted to help facilitate a “safe and sound exit plan” from conservatorship that included an explicit federal mortgage guarantee, which Broeksmit said was essential for maintaining stability and liquidity in the secondary market. 

“An unwelcome outcome would be confusion about to what extent the government is standing behind the security,” Fratantoni said. “Our worry is that there's a sense that there's a rush to get through this.” 

The elimination of a federal guarantee would not only push down the value of the securities offered by the agencies but also likely lead their credit to deteriorate and their debt costs to rise, Boesky said.

The agencies are also amid an expanding investigation meant to root out fraud in its books that Fannie Mae said in third-quarter reporting was the greatest risk factor facing the agency. It has suspended dealmaking with several mortgage brokers as it scrutinizes its balance sheet. 

“If they have the same capital level and it was privatized today, they would gap out so wide that it would be prohibitive,” Boesky said, using a term that refers to a wide and rapid swing in valuation.

It is a risk officials in the first Trump administration seemed aware of. The 2018 plan included the creation of an insurance program with an “explicit Federal guarantee” that would only be “exposed in limited, exigent circumstances,” according to HousingWire. The program would effectively replace the backstop that exists through conservatorship.

The Trump transition team didn’t respond to Bisnow’s request for comment. 

“Pretty much everyone thinks that [Fannie Mae and Freddie Mac] should pay the Treasury some sort of standby commitment fee for backstopping their obligations,” said Michael LaCour-Little, a semiretired finance professor at California State University, Fullerton and former director of economics at Fannie Mae. “Nobody knows quite what that number should be either.”

The 2018 proposal said “other competitive entrants” to the mortgage securities market would have access to the insurance program. But the reach of any insurance program would likely be a sticking point in any effort to unmoor the agencies from the federal government, Boesky said. 

The backstop would have to be offered to every mortgage securities broker to avoid creating a two-tiered market where one type of investment is significantly riskier.

“You’d have private mortgage companies and private securitizers,” Boesky said. “And then you’d have this gold-plated group.”