Latest news with #GSEs
Forbes
4 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
Yahoo
22-05-2025
- Business
- Yahoo
Fannie, Freddie Shares Surge as Trump Again Floats Privatization
(Bloomberg) — A proposal by President Donald Trump to privatize Fannie Mae and Freddie Mac after almost two decades under government control has the mortgage companies' stock prices leaping to their highest levels in 16 years. Can Frank Gehry's 'Grand LA' Make Downtown Feel Like a Neighborhood? NY Private School Pleads for Donors to Stay Open After Declaring Bankruptcy Chicago's O'Hare Airport Seeks Up to $4.3 Billion of Muni Debt NYC's War on Trash Gets a Glam Squad NJ Transit Makes Deal With Engineers, Ending Three-Day Strike Shares of Fannie soared 51% for their strongest performance since August 2009, while Freddie jumped 42% for its best day since September 2019. Both stocks saw very heavy volume, pushing them higher than they've been since the housing crash in 2008. While investors are enthusiastic about the plan, it will be tricky to pull off. Trump floated the idea in his first term, with Treasury Secretary Steven Mnuchin taking the lead, but ran into resistance over fears that any move to change their status as government-sponsored enterprises, or GSEs, would disrupt the mortgage market. What's more any move like this could require Congressional approval, something the current administration hasn't had to secure for the bulk of it's policies, which have been enacted via executive order. 'We do not see this as a change in policy,' TD Cowen analyst Jaret Seiberg said. 'The president has previously endorsed ending the conservatorships of Fannie Mae and Freddie Mac including in his first term. Despite those prior comments, the GSEs remain in conservatorship.' Taxpayers Rescue US taxpayers rescued Fannie and Freddie from failure in 2008 with a $191 billion bailout to cover the debt burdens they couldn't meet. The fear was their collapse would trigger a national housing meltdown. Since then, they've been required to send the bulk of their profits to the government, but their shares have continued to trade. 'There's a very active market of people attempting to capitalize on the news flow,' Bloomberg Intelligence analyst Ben Elliott said. 'While institutional investors understand the mechanics and hurdles that need to be overcome, many retail investors who invest in the common shares don't understand the potential risks of a diluted recapitalization structure.' Several advocates, including Pershing Square Capital Management's Bill Ackman, have called for the government to release the entities back to public markets. But there are still many unknowns about what an end of government ownership would look like and what it means for shareholders, who own just 20% of the the companies. Shares of Fannie and Freddie, which have traded over-the-counter since a 2010 delisting from the New York Stock Exchange, often encounter volatile swings. For years, they've traded like meme stocks as retail traders bet that a return to public markets could offer generous returns. The companies' preferred stock is joining the rally as well on Thursday, in this case on the assumption that a release from government control could mean a resumption of dividend payouts. Fannie and Freddie issued multiple series of preferred shares prior to their 2008 conservatorship, and many are still trading over the counter despite their uncertain status and lack of dividends. In addition to needing approvals, the companies have legal issues that also need to be straightened out. Analysts are skeptical about how quickly this could occur. 'The companies need to resolve all material litigation relating to the conservatorships, pursuant to a 2021 agreement,' Bloomberg Intelligence analyst Elliott Stein wrote in a note. Shares of Fannie Mae have jumped 242% this year, while Freddie has gained 147%. (Updates for market close.) Why Apple Still Hasn't Cracked AI Inside the First Stargate AI Data Center Anthropic Is Trying to Win the AI Race Without Losing Its Soul How Coach Handbags Became a Gen Z Status Symbol Microsoft's CEO on How AI Will Remake Every Company, Including His ©2025 Bloomberg L.P.
Yahoo
22-05-2025
- Business
- Yahoo
The restructuring Trump may need for Fannie Mae, Freddie Mac
President Trump is giving "very serious consideration" to bringing mortgage giants Fannie Mae (FNMA) and Freddie Mac (FMCC) — or the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation — public, according to the president's latest social media posting. Whalen Global Advisors Chairman Chris Whalen shares why he thinks the administration is bringing up spinning off these government-sponsored enterprises (GSEs) now. To watch more expert insights and analysis on the latest market action, check out more Morning Brief here. The president wants again, reiterating the desire to privatize Fannie and Freddie. Now, that's the talk has been around for years. As you are well aware and you've written a lot about, the devils in the details. So, what do the details need to be? The reason they're talking about this is they need the cash in order to make their tax cuts and their budget reconciliation bill work. How do you get cash from Fannie and Freddie? When they take them out at the end of the day, say two years from now, the US taxpayers going to own 98% of Fannie and Freddie. And what I've written is I said, look, you need cash, buy out the public common shareholders. Get rid of them. Leave the United States as the sole voting shareholder in the GSCs and issue a lot of preferred. You could create a new asset class around GSC preferred, single digit coupon. And guess what? You could give the treasury all the cash they need. And the other thing, Julie, remember, if they try and do a public offering with Fannie and Freddie common stock, they may take a loss. They may not be able to get par value for it. So if I want to give them their cash and get the government out as quickly as possible, I think they need to restructure both companies, buy out the common shareholders, and maybe offer a buyout to the existing preferred shareholders. Give them a little deal. They've been waiting for 15 years. Well, Bill Ackman's been pushing for this, right? Yeah, but we don't need to create a play thing for hedge funds. There's no point in having private common equity capital in the GSCs. It does not affect the rating. The only thing that can backstop the GSCs is the United States. So for example, if we take the issuers private, we still have to have treasury guarantee the mortgage back securities. Otherwise it does not work. You remember I worked at Kroll bond ratings. It doesn't work. So if Fannie and Freddie have to pay treasury, say 10, 12 basis points a year to cover their bonds, they may have to increase their guarantee fees. So there are a lot of pieces here that are going to have to be worked on. And they're just getting started. They did a lot of work on this in Trump one. It's in the closet. They got to get those documents out and then they got to find somebody to lead this process forward.
Business Insider
16-05-2025
- Business
- Business Insider
How a corner of the Trump trade could unleash higher mortgage rates
That's according to Pimco, which said this week that the privatization of Fannie Mae and Freddie Mac, the mortgage finance giants that were taken over by the government in the wake of the 2008 housing crash, might benefit shareholders but could jack up costs for borrowers. "If an exit from conservatorship is rushed and certain issues are not addressed — particularly as they relate to the government guarantee associated with the GSEs entering conservatorship during the global financial crisis in 2008 — many Americans could unwittingly face higher mortgage rates," analysts at the firm wrote. Discussion of reforming the government sponsored enterprises has been reignited in Trump's second term. The president failed to release the companies from conservatorship in his first term, but investors have been encouraged that this time could be different. Fannie Mae and Freddie Mac have soared since the November election, and are up 138% and 92% year-to-date, respectively. Ending the 16-year conservatorship could spawn an even larger outperformance, Pimco suggested. Yet, Pimco said it sees substantial risks if alternatives to re-privatizing Fannie and Freddie aren't considered. After all, these GSEs have evolved into an essential cog of the mortgage sector, accounting for 70% of the market. By purchasing mortgages and packaging them into bonds, the two agencies are an enormously important source of liquidity for the US housing market. Thanks to limits and controls set up by policymakers, the GSEs have become significantly less vulnerable to shocks under government oversight. That could weaken if the agencies go private, making mortgage borrowing riskier and potentially cutting into liquidity. "The potential widening of mortgage spreads and the resulting increase in primary mortgage rates could negatively impact both investors and consumers," JPMorgan wrote in January. "Uncertainty around government support after privatization might lead to higher and more volatile borrowing costs, worsening the current challenges in housing affordability." And higher rates are the last thing prospective homebuyers want to deal with in today's market. While prices remain elevated, the 30-year mortgage rate is also high relative to the ultra-low rates in the years after the financial crisis. The 30-year fixed mortgage rate was hovering around 6.81% this week. The point Pimco is making appears to be under consideration by the administration. In February, Treasury Secretary Scott Bessent said that Fannie and Freddie's release depends on the impact on mortgage rates. " The priority for a Fannie and Freddie release — the most important metric I am looking at is any study or hint that mortgage rates would go up," Bessent told Bloomberg.
