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Forbes
3 days ago
- Business
- Forbes
Privatizing Fannie And Freddie: Rationales And Credit Impacts
An American flag at a residential home in Discovery Bay, California, US, on Thursday, Nov. 7, 2024. ... More Mortgage rates in the US increased to the highest level since July. Photographer: David Paul Morris/Bloomberg All week, markets and politicians been dissecting the President Trump's proposal to privatize Fannie and Freddie. As they support 70% of the U.S. mortgage market, it is important to consider the credit markets impacts and risks for the U.S. These are still hard to work out until the rationale becomes clear, beyond removing the FHFA as conservator. Since their creation, the two main GSEs have been quintessential mixed-ownership corporations. In 1938, FNMA was established as a standalone company in the New Deal. It was acquired in 1950 by the entity that became the U.S. Department of Housing and Urban Development with two classes of shares: preferred, held by the U.S. Treasury, and common, non-voting, held by a network of mortgage lenders. In 1968, Fannie was reorganized and split into a successor FNMA and Ginnie Mae. The successor FNMA was listed on the New York Stock Exchange and chartered to purchase, bundle and sell residential mortgages as securities (RMBS). GNMA became part of HUD. Its function: to guarantee payments on securitizations backed by mortgages issued under programs by U.S. government departments like HUD, Veterans Affairs and Agriculture. FHLMC was created in 1970 along lines similar to FNMA—publicly traded, earning guarantee fees on loan portfolios, with HUD oversight—but its client network is smaller banks and credit unions rather than large banks. Originally, FHLMC was owned by the Federal Home Loan Banks, but under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 it became independent. In 1995, FHLMC diversified into making markets in subprime mortgage collateral. In 2008, Fannie and Freddie suffered material losses on their combined mortgage portfolio of USD 1.5 TN. They were bailed out, delisted from the NYSE on July 7, 2010, placed under FHFA's conservatorship, and began trading on OTC markets the next day. The stock of both institutions remains publicly investible alongside their residential mortgage-backed securities and corporate bonds. So there must be more to the current proposal than giving American investors access. The Big Beautiful Bill will shrink the U.S. tax base if it passes the Senate. Could privatizing these mortgage giants fill the gap with new, incremental tax revenues? It is hard to say without a concrete deal structure in place. However, the mortgage giants already pay taxes on operating income, as well as paying federal, state and local taxes on securities' earned interest. So the motivation to privatize is not obviously tax-related. It may have more to do with the U.S. Treasury currently owning the GSE preferreds as well as warrants on 80% of common stock. If pricing on a future IPO were to hit or exceed the target, the U.S. government could reap a one-time, massive windfall. Arranging banks would profit handsomely as well. A USD Trillion IPO (Chairman Pulte's estimate) could generate fees in the range of USD 40 to 70 Billion. That's plenty of incentive for a successful initial offering. But for most Americans, what matters more is what happens in the aftermarket. First, what would be the go-forward impact on rates for homebuyers? The more common theory is that the replacement entities, being purely profit-driven and maybe facing higher funding costs, would drive up rates—and up again as supply shrinks. A minority viewpoint says rates will go down as privatization drives innovation. The reality is—we can predict given a concrete exit plan, but without one, we just can't know. Second, and intimately linked, is the status of the U.S. guarantee. This decision would impact the entire credit market ecosystem starting with borrowers, whose numbers would shrink as government support goes away. If the new entities were to retain U.S. support in some form, the impacts on bank market microstructure and the competitive playing field are less clear; but don't expect the status quo to continue. Would a distributed ecosystem form anew, or would intense, uneven competition transform the U.S. bank market where only giants survive? Related to the status of the guarantee is how potential backlash could impact the U.S. government rating, which Moody's just downgraded to Aa1. Would global bond investors view sudden withdrawal as a default, regardless of the legal definition? And in this same point, will GNMA and its guarantee continue? The answer directly impacts home affordability for veterans, rural homeowners and disadvantaged groups. Third, are the potential changes to the GSE's current information disclosure regime. This question is not yet debated in the media but it should be. The go-forward disclosure package could have the greatest impact on aftermarket performance. Bonds are most active in the capital structure of GSEs today. Their required bond disclosures comply with the very best practices in the world that were created in the U.S. public securitization markets. Will the disclosures continue? Will the public have access to them after the IPO? Or will the financial position of the new players become more opaque as information disclosures lag changes in financial performance? We have seen this movie before in the GFC. It did not end well. Fourth, the operational impacts of privatization are unclear. Will the 30-year fixed rate model made in the 1930s continue or gradually be replaced by loan structures benefitting borrowers less and lenders more—floating rate indices, shorter and longer maturities, different funding formulas? Will a forward-settled market replace the To Be Announced market that FNMA and FHLMC currently use? The TBA market today allows sellers to fund their origination pipelines and buyers to lock in prices before transaction specifics are settled because the guarantee equalizes the potential risk between offerings. The cost benefits, which can be quite substantial, may disappear if the guarantee goes away. Fifth are what Donald Rumsfeld called unknown-unknowns. If the first four categories of unknowns are known (with the possible exception of #3), news unfolding daily shines a light on impacts we have not yet thought of. Was Moody's downgrade of FNMA a reflection of recent past performance, or does it also anticipate future shocks to the organization? Does the introduction of an anti-crime unit with AI fraud detection technology materially impact how ? WASHINGTON, DC - FEBRUARY 27: William Pulte, nominee for Director of the Federal Housing Finance ... More Agency testifies at a hearing of the Senate Banking Committee on February 27, 2025 at the Dirksen Senate Building in Washington, DC. When FHFA Director Bill Pulte says, 'what we're trying to do…is take cost out of the system and get homes so they can be affordable again,' is he referring to the current interest rate levels or foreshadowing a collapse in prices? These scenarios have drastically different economic consequences. Finally, when President Trump says, 'the U.S. will keep its implicit GUARANTEES,' the key word seems to me to be the one in small caps: implicit. Equities are story paper, but bonds are based on contracts; and it is hard to assign a financial value, positive or negative, to implicit support.
Yahoo
4 days ago
- Business
- Yahoo
Bill Ackman is keen on Trump privatizing Fannie Mae and Freddie Mac. There's a right way and a wrong way to do it
This week, President Trump made a long-awaited announcement concerning the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). On Tuesday, Trump wrote in a Truth Social post: 'I am working on TAKING THESE AMAZING COMPANIES PUBLIC, but I want to be clear, the U.S. Government will keep its implicit GUARANTEES, and I will stay strong in my position on overseeing them as President.' While part of his proposal is sound—these two government-sponsored enterprises (GSEs) should indeed be removed from Federal Housing Finance Authority (FHFA) conservatorship—the implicit government backing of the GSEs must be removed, too. The GSEs have been under FHFA conservatorship since September 2008, when their bankruptcy quickly precipitated a wider financial crisis. They remain a singular force in housing finance. Fannie and Freddie currently hold more than $7 trillion in mortgages. Most of these mortgages have funded purchases of single-family residential property and account for about half of all such finance. The GSEs also provide about one-third of multifamily mortgage finance. Privatization is an enormous opportunity that is also freighted with risks. To begin a conversation about privatizing Fannie and Freddie is to suggest that they have returned to health, as well as to contemplate the largest public equity offering in history. But Fannie and Freddie remain fragile, and small changes in the structure of a privatization deal can put hundreds of billions of dollars at risk. Poor execution can leave taxpayers exposed to future bankruptcies and reverberate through mortgage finance and capital markets in unexpected ways. It is worth taking the time to get the details right. Americans' attachment to the GSEs rests on the desire for cheap mortgage finance. The GSEs are widely credited with making 30-year, fixed-rate, prepayable mortgages widely available at low cost. This is not the norm internationally, where floating interest rates, shorter maturities, and prepayment penalties are more common features. The GSE mortgage structure reduces monthly payments and transfers interest rate risk from borrowers to lenders. Private mortgage providers have firmly embraced the GSEs' mortgage structure and provide finance at a comparable price. The difference in interest rates between privately underwritten 'jumbo' mortgages which are too big for the GSEs and otherwise identical 'conforming' GSE mortgages has averaged a mere 6 basis points (0.06 percent) over the past five years, albeit with swings of 60-70 basis points in either direction. Thus, it is not obvious that the continued existence or pricing of 30-year fixed-rate mortgages depends on the GSEs. Since 1992, the FHFA has been required to establish annual housing goals for the GSEs. These goals tend to set thresholds for mortgage availability using equity-based criteria like geography and household income. Borrowers who cannot otherwise satisfy the GSEs' underwriting criteria may qualify for mortgages through these programs. Yet it is not clear that these programs provide more benefits than other government housing programs or private banks' Community Reinvestment Act activities. Nevertheless, the GSEs enjoy significant legal and regulatory advantages over the regulated financial system. The GSEs are neither chartered as banks nor required to meet bank prudential standards. Their required capital is far less than that required for bank balance sheet lending or private securitizations. They raise debt on favorable terms due to their proximity to the government. Trillions of dollars in agency debt and mortgage-backed securities (MBS) are held by the Federal Reserve and the banking system, where regulations deem them far less risky than comparable debt obligations. This combination of light-touch regulation, leverage, and cheap finance allowed the GSEs to quickly devour much of the residential mortgage market from the 1980s through 2008. When the GSEs failed in September 2008, it became clear that they had raised finance cheaply not because they were superior managers of risk, but because investors correctly anticipated that the United States Treasury would backstop them in a crisis. The Treasury committed hundreds of billions in capital to the GSEs, receiving senior preferred stock and warrants to purchase 79.9% of their common stock. Exercising those warrants gave the Treasury majority ownership and control of the GSEs, which was used to sweep all GSE profits into the Treasury. The GSEs have returned to profitability, but their finances remain precarious. At the end of 2024, Fannie was operating at 46x leverage, while Freddie stood at 57x (the largest banks are effectively capped at 20x). To reduce their leverage to reasonable levels, the GSEs must more than double their equity, which will take about a decade at their current rate of profitability. Bill Ackman's Pershing Square holds 2% of Fannie Mae's equity and has a plan for privatizing the GSEs that is well-calibrated to our current political moment. In Ackman's 'The Art of the Deal' presentation from earlier this year, Obama and Biden are the villains, stealing the GSEs and their profits, while Trump is the hero who can save them. Ackman's plan pays lip service to curtailing the benefits enjoyed by the GSEs, but the details of his plan leave most of them untouched. He wants the GSEs to remain outside the sphere of bank regulation and free to employ immense leverage. He likes the privileges GSE securities enjoy at the Fed and on bank balance sheets. He would like to formalize a government backstop of the GSEs as a kind of reinsurance arrangement, but these crucial details are left to the imagination. Ackman is keen to have Trump 2.0 achieve privatization by executive action. But because the statutes enabling the GSEs' role in housing policy cannot be canceled by the executive, executive action would leave the GSEs' role in future housing policy unresolved. The need for legislation on this question requires reading Congress in on any privatization plans. It would be foolish for the Treasury to give away the GSEs' profits while retaining the tail risk. There is no reason why the GSEs cannot compete alongside other mortgage-backed securities issuers as private entities. However, it would be reckless to privatize the GSEs with a full complement of government-subsidized advantages in prudential regulation, funding terms, and catastrophe insurance. The GSEs should compete and survive on the same terms as other regulated financial firms. To bring them within the perimeter of prudential regulation, the GSEs should be rechartered as Financial Holding Companies and designated systemically important institutions, subjecting them to the supervision and regulation of the Federal Reserve. The GSEs would be expected to maintain adequate levels of capital and manage risks according to best practices. Why should they be exempt? The GSEs must also give up their funding advantages. The Federal Reserve should treat agency debt and agency MBS like their private sector counterparts by selling the agency obligations in its portfolio and refraining from future purchases. Bank capital regulations should similarly apply credit risk weights to agency obligations without prejudice. Privatized GSEs should not be available to the government as instruments of policy. The divorce is necessary to blunt the GSEs' claim on public assistance in future crises. Giving up the GSEs does not require giving up on housing policy, which is also pursued through multiple other agencies. An act of Congress terminating the GSEs' place in housing policy is essential. Preparing the GSEs properly for privatization will take several years to solidify their finances, rebalance their footprint in the regulated financial system, and decouple their obligations from the Fed's balance sheet. When preparations are complete, selling hundreds of billions in GSE equity will require years of steady execution. The impossibility of any investor achieving a controlling stake makes it even more important to establish robust corporate governance, processes, and controls prior to a public offering. Competently-run, -regulated, and -privatized GSEs will be profitable, but also much smaller than they were in 2008. Privatizing rechartered, re-regulated GSEs will raise significant funds for the government, reduce risks to future budgets, and allow the rest of the financial system to compete on a level playing field. There is no economic reason why the Trump administration should fast-track a privatization process, and Congress should not allow the GSEs or other valuable government assets to be dumped at fire-sale prices for short-term political advantage. The opinions expressed in commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune. This story was originally featured on
Miami Herald
4 days ago
- Business
- Miami Herald
Housing market chief Pulte sends blunt message on Fed interest rate cuts
In the midst of one of the slowest spring real-estate markets in decades, the director of the Federal Housing Finance Agency strongly urged Federal Reserve Chair Jerome Powell to resume cutting the central bank's interest rates. Trump-appointee FHFA Director William J. Pulte made his blunt request on X just a few days before the minutes of the May Federal Open Meeting Committee, chaired by Powell, showed multiple reasons why the central bank chose not to reduce rates. Don't miss the move: Subscribe to TheStreet's free daily newsletter Pulte and other Trump administration officials have been demanding that the independent Federal Reserve Bank's leaders cut interest rates as early as its June or July meetings to allow, among other outcomes, mortgage rates to drop for was sworn in as the director of the U.S. Federal Housing Agency, FHFA, following his nomination by President Donald J. Trump and bipartisan confirmation by the U.S. Senate. In this role, Pulte oversees Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Related: Fed official sends strong message about interest-rate cuts He knows a thing or two about the housing market. Pulte is the grandson of the founder of PulteGroup, one of the largest U.S. homebuilders. He has had a longstanding career in homebuilding, housing products, and community development, including sitting on PulteGroup's board from 2016 to 2020. In 2011, Pulte founded Pulte Capital Partners LLC, an investment firm that focuses on building and housing products. He's also widely followed on the social media site, "X", where he garnered over 3.2 million followers partly due to his focus on philanthropy. As inflation stays relatively steady and housing inventory dries up, Pulte turned to Elon Musk's social media platform X to plead for a long-awaited change in the federal funds interest rate. More Economic Analysis: Hedge-fund manager sees U.S. becoming GreeceA critical industry is slamming the economyReports may show whether the economy is toughing out the tariffs The Federal Reserve impacts consumer interest rates by influencing the federal funds rate, which in turn affects the money supply. When the federal funds rate is lowered, it can stimulate economic growth and lower interest rates for consumers. Mortgage rates are impacted by changes in the 10-year Treasury note, which is influenced by changes in the Fed Funds Rate. Most U.S. mortgages, particularly the 30-year fixed rate, are influenced more directly by the movement of the 10-year Treasury yield. The current Fed Funds Rate is between 4.25 and 4.50%. The average interest rate on a 30-year home mortgage is approximately 6.86%. The 10-year Treasury yield as of May 29 is 4.32%, an increase from early 2023. Some analysts believe the 10-year Treasury yield could reach 5.5% by the end of the year if inflationary pressures and global trade policies are not addressed. "Jay Powell needs to lower interest rates - enough is enough," he wrote. "President Trump has crushed Biden's inflation, and there is no reason not to lower rates. The housing market would be in much better shape if Chairman Powell does this," Pulte said in the X post on May 27. Pulte says the rate cut is overdue and prolongs the multiple economic damages the Biden administration left behind. Pulte did not mention Trump's seesawing tariffs. Redfin recently announced that there were 500,000 more buyers for homes in the United States than inventory of houses for sale. Related: Fed minutes send strong message on interest-rate cuts The Arena Media Brands, LLC THESTREET is a registered trademark of TheStreet, Inc.
Bloomberg
4 days ago
- Business
- Bloomberg
Pulte Sees No Scenario Where Trump Isn't in Control of Fannie Mae, Freddie Mac
Federal Housing Finance Agency Director Bill Pulte said he cannot envision a situation where President Donald Trump relinquishes control of Fannie Mae and Freddie Mac, emphasizing there is a need to keep implicit guarantees intact as the administration considers potential options for the two mortgage giants. 'I don't see any scenario where the president isn't in control of Fannie Mae and Freddie Mac,' Pulte said during an interview with Bloomberg Television Thursday.
Yahoo
5 days ago
- Business
- Yahoo
Fannie Mae, FHFA, and Palantir Join Forces to Combat Mortgage Fraud—FundingShield Supports This Initiative With Its Proven, Real-Time Solutions
NEWPORT BEACH, Calif., May 29, 2025--(BUSINESS WIRE)--In a major step toward protecting the integrity of the U.S. housing finance system, Fannie Mae CEO Priscilla Almodovar, FHFA Director Bill Pulte, and Palantir Technologies CEO Alex Karp have joined forces in a coordinated initiative to combat mortgage fraud across the homebuying process. This effort reflects a broader industry commitment to strengthening fraud prevention and financial integrity Public and private stakeholders—including Fannie Mae, FHFA, and Palantir—are leveraging technology and data-driven insights to detect fraudulent activity more effectively. This policy initiative, initiated by President Donald J. Trump and led by Bill Pulte, brings government and industry leaders together to strengthen protections for homebuyers and financial institutions, fostering a more secure and transparent lending environment. FundingShield, the leader in transaction-level fraud prevention and real-time risk management, welcomes this industry-wide push for greater security in mortgage transactions. Having safeguarded over $4 trillion in closings, FundingShield brings extensive expertise and trusted technology to the fight against mortgage fraud, wire fraud, and title fraud. "Fraud in mortgage transactions can appear at multiple stages—from loan applications to closing, and even post-funding. It's a systemic issue that requires proactive monitoring and remediation," said Ike Suri, Chairman and CEO of FundingShield. "Our embedded, real-time technology doesn't just identify fraud—it remediates it, helping transactions close securely and efficiently so homebuyers and lenders can move forward with confidence." FundingShield's suite of API-enabled tools is fully integrated with key industry partners, including ICE Mortgage Technology, SitusAMC, Mastercard, and Tata Consultancy Services (TCS). These integrations allow for secure, streamlined, and scalable fraud prevention solutions that reduce operational costs and translates to tangible ROI while improving efficiency—ultimately benefitting homebuyers, Sellers, Lenders, Title companies and investors. With a firm commitment to risk management, regulatory compliance, fraud prevention and remediation, FundingShield continues to set the standard for secure and verified mortgage transactions for clients. By providing and leveraging our proprietary decision ready data, advanced machine learning, and deep industry connectivity, FundingShield remains a trusted partner in ensuring safe and reliable home financing. About FundingShield FundingShield is a leading provider of wire and title fraud prevention, transaction-level risk management, and real-time decision ready fraud detection and remediation. As the only MISMO-certified firm offering transaction-level fraud prevention, FundingShield leverages live source verified data, and machine learning to enhance security and compliance across the mortgage industry. With a proven track record of safeguarding over $4 trillion in closings and processing over $70 billion in monthly transactions, FundingShield's scalable, API-driven solutions help lenders, investors, and asset managers reduce costs, mitigate risk, and ensure seamless mortgage transactions. View source version on Contacts Media Inquiries and to learn more about our firm:FundingShield+1 949-706-7888Info@ Visit us on social media:LinkedIn Facebook Twitter Sign in to access your portfolio
