Shares of the US-government owned twin giants, Fannie Mae and Freddie Mac that are tasked with expanding credit availability in the American market by securitising mortgages, surged over 20 per cent on Friday after the Wall Street Journal reported that the Trump administration may privatise the two institutions this year.
The stock price of the Federal National Mortgage Association, known as Fannie Mae, surged 18.09 per cent on Friday at 11 PM IST to $9.79 apiece. Stocks of Freddie Mac, or the Federal Home Loan Mortgage Corporation, soared 20.45 per cent to $7.95 apiece on Friday.
US President Donald Trump has previously met the top leadership of US investment banks such as Citigroup, the Bank of America, Goldman Sachs and JPMorgan Chase to explore potential public offerings of the twin mortgage giants, Reuters reported, citing an official.
The incentive to sell Freddie Mac, Fannie Mae
Trump has argued for the monetisation of these two institutions, which were brought under US government control in the aftermath of the 2008 financial crisis.
In May this year, Trump floated the idea while emphasising that the government will maintain its implicit guarantees for the securities issued by the two institutions.
Trump backer Bill Ackman, a long-time shareholder in the twin behemoths, has repeatedly called for their privatisation. Ackman, founder, Pershing Capital Management, told Forbes magazine last month that the US government is the preferred stockholder of the twins, and in a position to realise gains worth $300 billion.
He argued that the two institutions were “vastly better capitalised” today than for the past 60 years.
Story continues below this ad
The two institutions are not banks, but tap creditworthy mortgage buyers and pack the mortgages in securities to be sold on the market, Ackman explained. Fannie Mae and Freddie Mac have guarantees worth $7 trillion coupled with enormous cash flows, apart from a government backing, underlining their ability to weather any future crisis, Ackman added.
Hurdles to the privatisation plan
Treasury Secretary Scott Bessent has said in the past that privatisation of the twin behemoths will have to be done carefully to ensure that the mortgage spreads “do not widen”.
To be sure, the two institutions remain endemic to the “health and stability of the US mortgage market”, according to a paper by Moody’s Analytics Chief Economist Mark Zandl and Urban Institute fellow Jim Parrot on the privatisation of government-sponsored enterprises (GSEs).
In their paper, Zandl and Parrot argue that conservative lawmakers have opposed the “implicit guarantee” stating it favours market investors over taxpayers. “The Trump administration will thus presumably go to some pains to argue that once it releases the GSEs there will be no such taxpayer support beyond the PSPAs. Rather, shareholders and creditors, not taxpayers, would bear the cost of the GSEs’ failures the next time around,” they write.
Story continues below this ad
Unlike commercial banks, Fannie Mae and Freddie Mac are regulated jointly by the US Treasury Department and the US Federal Housing Finance Agency. While provisions have been tweaked to allow the Treasury Department to release the two entities from its conservatorship, there will be the question of their rating as well.
“If the GSEs were to exit conservatorship while maintaining the PSPAs or similar support, their ratings could remain aligned with the US sovereign rating,” Fitch Ratings said in a commentary released in January.
“Absent the PSPAs or equivalent support, and reduced strategic importance to the US housing market, Fitch would rate Fannie and Freddie on a standalone basis considering their monoline business models and product concentration, counterbalanced by strong capitalisation levels,” the rating agency added.
PSPA or Senior Preferred Stock Purchase Agreements are contracts between the Treasury Department and each of the entities, which ensure that the two remain cash positive and that taxpayers’ money remains safe in the event of a crisis.
Story continues below this ad
The privatisation of Fannie Mae and Freddie Mac “would eventually involve the largest initial public offering in history, resolving a taxpayer investment of $330 billion that cannot easily be written down,” warn Zandl and Parrot in their paper titled ‘Fannie and Freddie’s Implicit Guarantee — Another Iceberg on the Path to Privatization’.
The process will also involve “setting a fee for Treasury’s $250 billion line of credit that reflects its value but does not bankrupt the GSEs, all while transitioning much of the nation’s mortgage infrastructure into private hands during the worst housing affordability crisis in a generation,” they added.
.