Trump's Fannie Mae, Freddie Mac Privatization Plan Unsettles Wall Street

Donald Trump's recent announcement regarding the potential re-listing of government-controlled mortgage giants Fannie Mae and Freddie Mac has left Wall Street analysts bewildered and uncertain. The plan, which aims to privatize these companies, has raised several questions about its feasibility and potential impact on the housing market and the broader economy.

Fannie Mae and Freddie Mac, often referred to as the "two GSEs," are pivotal in the U.S. housing market. Prior to the 2008 financial crisis, they guaranteed or purchased over 80% of the country's mortgage loans. Following the crisis, both companies were delisted from the New York Stock Exchange and placed under government conservatorship. Their primary function is to purchase mortgages from lenders, bundle them into securities, and sell them on the secondary market, thereby freeing up capital for lenders to issue more loans. Proponents of government sponsorship argue that this model, combined with government guarantees, helps keep mortgage rates low.

However, Trump has been exploring the possibility of privatizing the "two GSEs" since his first term. The director of the Federal Housing Finance Agency, Bill Pulte, has indicated that the government is considering a plan to sell shares in these companies while keeping them under government oversight. This approach has left many analysts puzzled, as it suggests a hybrid model where the companies would operate under government control but with some level of private ownership.

Tim Pagliara, chairman and chief investment officer of CapWealth, described Pulte's information as confusing. He suggested that allowing Fannie Mae and Freddie Mac to operate under government conservatorship while selling shares could be a strategy discussed between the government and investment bankers. This would enable the government to control mortgage rates and prevent them from rising due to market fluctuations. However, Pagliara compared this approach to putting training wheels on a bicycle, implying that it is not a sustainable long-term solution.

Many housing finance analysts have expressed concerns about the attractiveness of this model to investors. They argue that under government control, the primary goal of these companies would not be to maximize shareholder value but to fulfill government objectives. This uncertainty could deter potential investors, making the re-listing less appealing.

Jim Parrott, a senior fellow at the Urban Institute and former economic advisor to the Obama administration, noted that it is difficult to envision significant investor interest in companies operating under a conservatorship model. He emphasized that for the re-listing to be successful, the government would need to operate these companies in a manner that is friendly to investors, which is currently not the case.

David Dworkin, president and CEO of the National Housing Conference, added that a key factor in selling shares is the independence of the board and its fiduciary responsibility to shareholders. Under the conservatorship model, achieving true independence is impossible, which could lead the market to view the companies' shares as worthless.

Another analyst raised concerns about the potential for future government interventions. Given that the federal government still owns the majority of Fannie Mae and Freddie Mac's assets, there is a risk that a future administration could implement different control measures. This uncertainty could further dampen investor enthusiasm.

As of now, the Trump administration has not provided a detailed plan for the re-listing. Pulte is scheduled to meet with Treasury Secretary Steven Mnuchin and Securities and Exchange Commission Chairman Jay Clayton this week to discuss the disposition of Fannie Mae and Freddie Mac. Parrott highlighted that the Treasury Department has not yet been deeply involved in the re-listing plans, indicating that the government is still in the early stages of analyzing potential strategies. Until the Treasury Department takes meaningful action, the future of the "two GSEs" remains uncertain.