Breitbart Business Digest: The Trump Administration Is Not Going to Release Fannie and Freddie

The Delusion of Fannie and Freddie’s Release Rises Again

Investors who have convinced themselves—or been convinced by wealthy hedge fund managers talking their books—that the Trump administration is determined to release Fannie Mae and Freddie Mac from the government control are likely in for a painful surprise.

In yesterday’s Breitbart Business Digest, we discussed the history of efforts by investors to score a windfall through their shares of the common and junior preferred shares of Fannie and Freddie.

Now that Trump has returned to the White House, investors are once again betting the companies will be released and returned to shareholder control. And they are fiercely lobbying Trump officials, directly and indirectly, for them to be released. The conviction that this time will be different and that Fannie and Freddie will be released has sent the shares soaring.

The most likely outcome, however, is that the companies will remain in conservatorship for the duration of the Trump presidency. There are no active plans within the Trump administration to release them; and while Trump supports release in theory, people familiar with the president’s thinking say they do no expect him to spend any political capital to bring it about. The priority of issues like trade, immigration, energy, taxes, ending DEI and ESG mandates, and taming inflation are likely to leave little time for breaking new ground on GSE policy.

Scott Bessent, Trump’s pick to run the Treasury Department, has expressed almost no interest in the issue. It did not come up in his recent confirmation hearing before the Senate finance committee. In written answers provided to senators, Bessent said that the conservatorships should not be indefinite but was noncommittal about what would happen next. In meetings with senators, Bessent has reportedly said that dealing with Fannie and Freddie is not a priority. As an experienced hand in global financial markets, Bessent is wary of doing anything that might be viewed as disruptive to the mortgage market, according to people familiar with his thinking.

The controlling law—the Housing and Economic Recovery Act of 2008—may not permit them to be unilaterally privatized by the administration. Its text contemplates only one way of exiting conservatorship—through receivership. This is consistent with what happens when banks fail and cannot be immediately resolved by banking authorities. They are placed into a bridge conservatorship and allowed to operate for a period before entering a receivership that wipes out their shareholders and leads to the sale of their assets, business lines, and eventual dissolution. It’s possible that the broad discretion granted to the FHFA as conservator would allow for privatization, but that’s not a legal certainty.

A big challenge to any attempt to turn Fannie and Freddie into normal companies not backed by the government is how to avoid recreating the implicit guarantee without killing off their ability to provide stability and liquidity to the mortgage market. This is no easy task and many market participants are skeptical it can be accomplished at all. Instead, reducing the government’s role in the mortgage market would likely require a wholesale rethinking of how mortgage bonds are guaranteed, perhaps by eliminating Fannie and Freddie altogether and replacing them with something entirely new.

“Indeed, given their centrality to the housing finance system, it would take some effort to convince the market that the GSEs would not be bailed out if their explicit support was exhausted. If the administration were to succeed, however, it is difficult to see how the GSE model would work, or work in any way that anyone should take comfort in,” Jim Parrot and Mark Zandi recently argued in a paper for the Urban Institute.

The most likely path for the Trump administration is to allow lawmakers to take the lead in crafting an exit plan for Fannie and Freddie—or to craft a new structure for the secondary mortgage market altogether. The lack of questions about this at Bessent’s hearing, however, were a sign that lawmakers do not consider this a pressing issue. It’s also unclear that an agreement could be reached that would satisfy both liberal housing affordability advocates—who see Fannie and Freddie as tools for expanding homeownership among lower-income Americans—and conservatives who want market processes to determine the future of the mortgage market.

There’s also the question of whether there would be any value leftover for the holders of the common and junior preferred shares if the companies were privatized. The government’s preferred shares entitle it to $300 billion in a liquidation and almost 80 percent of the common shares. Building large enough capital cushions in the near-term would likely require selling additional equity stakes to investors, further diluting the current shares.

Trump Won’t Do the Big Giveaway

The plan recently proposed by Bill Ackman, the billionaire investor whose funds have amassed a huge position in the common shares of Fannie, is probably a nonstarter. He would have the government essentially erase its $300 billion preferred stake with the swipe of a pen, essentially gifting it to shareholders. Government lawyers have argued to senior officials in prior administration’s that such a move would likely be illegal. It’s also decidedly un-Trumpian. In a letter to Senator Rand Paul (R-KY) in 2021, Trump said he would sell the government’s share “at a huge profit.” That’s not consistent with giving away hundreds of billions of dollars of taxpayer value.

The political backlash that would come from enriching hedge fund managers by adopting anything like Ackman’s plan would be extreme, playing into criticisms that Trump’s administration operates to the benefit of an oligarchy. It would likely damage the president’s populist credentials. Privatization would also likely drive up the cost of mortgages as the companies passed on their higher costs of borrowing and higher capital charges to home buyers—not something the Trump administration would like to see happen at a time when they are promising to bring down inflation.

Perhaps more importantly, there’s very little economic or political upside for Trump to privatizing Fannie and Freddie. Trump would be taking the political risk—and the risk of disrupting the mortgage market—while investors reaped the profits.

It’s unlikely that the Trump administration makes a serious attempt at bringing Fannie Mae and Freddie Mac out of conservatorship as private companies. Certainly, that is not in the cards for the first two years of the administration, which will be focused on the issues for which Trump received his electoral mandate. When investors come to grips with this reality, much of the 420 percent gain in the common shares since election day are likely to fall away.