President Donald Trump has begun his second term. All week, Inman has been digging into the administration’s housing policy, from dismantling HUD to growing antitrust issues. Read the first article in the series here and the second here. Part 5 on Friday outlines his plans for antitrust law.
Sixteen years after being placed in conservatorship, Fannie Mae and Freddie Mac appear closer than ever to privatization.
Days before Inauguration Day, President Trump nominated private equity CEO and philanthropist Bill Pulte to head the Federal Housing Finance Agency.
FHFA is responsible for the overall management of the two government-backed companies and has authority over management, boards of directors, and shareholders, according to the agency’s website. However, FHFA governance no longer appears necessary for Fannie and Freddie, as both companies have posted positive business results for more than 20 consecutive quarters.
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Bill Palt |Credit: X
The founders of Pulte Capital Partners LLC have not yet disclosed their plans for FHFA, but that is likely to become clear during the confirmation hearing. But the mortgage industry appears to be welcoming Mr. Pelt’s ideas and ways to get Fannie and Freddie out of conservatorship.
“Bill is not well known in Washington, but we worked together in Detroit. I can tell you first-hand that he has a deep knowledge of the industry,” said David, CEO of the National Housing Council. Dworkin said last week.
“When Detroit was at its worst with the 2013 bankruptcy, Bill returned to his hometown to work in the areas hardest hit by the foreclosure crisis. We look forward to being an important voice in the Trump administration’s efforts to make housing more affordable.”
If Mr. Pulte is confirmed, he will not work alone to privatize Mr. Fannie and Mr. Freddie. He will work alongside Scott Bessent, who is awaiting the outcome of his confirmation hearing on January 16th. Mr. Bessent did not provide details of his plans for the companies. However, Sen. Elizabeth Warren (D-Mass.) was asked to answer 17 questions about the future of Fannie and Freddie, including Congressional involvement in the privatization process and the conditions the companies must meet before getting the OK. asked the candidates.
While the exact strategy remains vague, experts say one thing is clear: there’s a lot at stake.
“If privatization of the GSEs proceeds, it will likely be a large and complex project that will take several years and require coordination among all three branches of government,” said a new analysis by asset management firm DoubleLine. “Although there are significant risks to privatization, and it is unclear whether there will be any political or economic upside compared to the status quo, it is certainly possible and it is likely that some of it will be attempted at some point by the next administration. Volatility in the government mortgage-backed securities market, which could trigger sporadic privatizations. ”
A quick look back
Government-backed companies Fannie Mae and Freddie Mac have been under conservatorship since 2008. In September of that year, then-Treasury Secretary Henry Paulson and FHFA Administrator James Lockhart announced the GSE conservatorship, noting that Fannie and Freddie’s business models relied on purchasing. It was buried under $5.4 trillion in debt stemming from the subprime mortgage crisis by taking loans from banks and selling them as mortgage-backed securities.
The conservatorship allowed Fannie and Freddie to remain private. However, according to the 2008 Inman report, the government acquired a 79.9 percent stake in each company. The conservatorship allowed Fannie and Freddie to maintain solvency with the goal of streamlining their portfolios and increasing operational efficiency.
Fannie and Freddie’s finances have since recovered 180 degrees from the Great Recession, with the GSE’s most recent earnings report reflecting a combined net worth of $147 billion. Talk of Fannie and Freddie leaving the conservatorship reached a climax after FHA released a memo in 2019 recommending that it could safely operate without government approval. However, five years later, Freddie and Fannie have not resigned from their guardianship.
President-elect Trump has promised to expedite the reinstatement of Fannie and Freddie, who were unable to return to civilian status during his first term. According to a previous Inman article, President Trump came close to privatizing the GSEs in 2020. However, his election loss created space for Democrats to implement this plan.
Not “if” but “when” and “how”
The Wall Street Journal reported in September that President Trump, with support from former National Economic Council Director Larry Kudlow and former White House Director of Personnel John McEntee, will privatize Fannie & Freddie in early 2024. It was reported that they have begun formulating a plan. The Journal did not say which banks were involved in the planning process.
Before the election, President Trump’s privatization plan, a “recapitalization” plan to use his words, relied on the GSEs using the FHA to bypass Congress and release companies from conservatorship. Another option, according to an earlier Inman article, was to use the Treasury Department to buy out parts of Fannie and Freddie loans.
Michael Fratantoni
The election results mean Republicans have a majority in the House (215-220) and Senate (47-53), meaning it will be easier for Trump to win Congressional support for his plan. I am doing it. But Mike Fratantoni, chief economist at the Mortgage Bankers Association, said it could take much of Trump’s second term to take Fannie and Freddie private, even with support from Congress. He said there is.
“Retail investors will end up owning at least a majority, if not all, of the stock in these companies. It’s going to be a long process,” Fratantoni told Mortgage Professional America Magazine last month. told. “The U.S. Treasury has invested hundreds of billions of dollars in these companies, and it will take time to exit these positions in a way that does not disrupt the smooth functioning of the market.”
“This is a $6 trillion-plus market, so you don’t want to mess with this,” he added. “You have to do it very carefully and methodically. And the downside of getting it wrong is very dangerous.”
It’s unclear whether this plan, like some of President Trump’s other policies, will be more bark than bite. When asked for additional details about the privatization of Fannie & Freddie, Trump Vance’s transition press secretary, Caroline Leavitt, told CNN, “No policy is official unless it comes directly from President Trump. It should not be considered.”
What privatization means for borrowers
If this plan becomes a serious plan for President Trump, there is broad consensus that privatizing Fannie & Freddie would lead to higher costs for borrowers.
Vice President and Democratic presidential candidate Kamala Harris said during the campaign that privatizing the GSEs could increase homebuyers’ interest costs by $1,200 a year. PolitiFact investigated Harris’ claims based on a 2015 study by Moody’s Analytics and the Urban Institute, “The Privatization of Fannie and Freddie: Be Careful What You Ask for.”
Mark Zandi |Credit: X
Study co-author Mark Zandi said the study looked at what happens when Fannie and Freddie are removed from conservatorship through recapitalization and release. According to the study, restructuring and privatizing GSE debt would raise mortgage rates by 43 to 97 basis points, or nearly 1% (100 basis points = 1%).
“The Harris campaign said it split the difference and factored in a 70 basis point increase in mortgage rates in its calculations,” PolitiFact reported. “According to Experian, they used the average mortgage balance in 2023 ($244,498) and the effective interest rate on mortgage debt at the end of 2023 (3.8 percent). Your payments will be $1,139 per month.If this rate increases to 4.5%, your payments will increase to $1,239 per month. An extra $100 per month means consumers will pay $1,200 more per year in their mortgage payments. ”
Zandi said the paper’s findings are likely to hold up in today’s market, meaning Harris’ estimates are not far-fetched.
Several other experts PolitiFact spoke to agreed that privatization would lead to higher costs for borrowers. But the final outcome will be based on a long list of variables that remain unanswered, including the financial and regulatory terms of Fannie & Freddie’s privatization deal, they said. Depending on the method, the additional costs can be negligible or significant enough to plummet homeownership rates.
A 2020 Congressional Budget Office (CBO) report said the deal “emphasizing increased private capital and lower federal guarantees on mortgage loans” would lead to a slight increase in interest rates. But the CBO said home prices are likely to decline slightly as well, meaning borrowers may be able to break even overall.
Meanwhile, a previous U.S. Department of Housing and Urban Development (HUD)-commissioned study found that privatization could have a devastating impact on “African Americans, low-income households, and people living in central cities” who rely on government-backed loans. It says that there is a sex.
Even if President Trump decides to forego the challenge of privatizing Freddie and Fannie, now is the time to decide the best path forward, said Susan Wachter, a professor at the Wharton School at the University of Pennsylvania.
“The law says it will eventually be privatized,” she told CNN. “But the stakes are very high as to how this will play out.”
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