Economists Size Up Government’s Hints on GSE Privatization
A never-before-tried idea could recapitalize Fannie and Freddie, but a focused, accountable governance structure is key to making it work.
The odds of Fannie Mae and Freddie Mac being privatized appear to be going up.
Earlier this week, the Wall Street Journal reported that President Trump is contemplating signing an executive order mandating that federal housing departments study an ending of the GSE’s conservatorship, which has been in effect since 2008.
The news follows mentions by Treasury Secretary Scott Bessent that the administration is mulling using its existing stakes in the agencies as assets for a new government-sponsored sovereign wealth fund. Last month, President Trump signed another executive order that tasks the Treasury and Commerce secretaries with developing a plan for creating such a fund.
Meanwhile, there’s been a shakeup of the agencies’ and the overseeing Federal Housing Finance Agency’s leadership following the confirmation of William Pulte as its new director. Pulte, also the self-appointed board chair of Fannie and Freddie, was quoted as being open to the idea in a March 13 interview with CNN.
HUD Secretary Scott Turner has outlined a new proposal for a privatization, as well.
The potential of SWFs
Moving the federal government’s holdings in Fannie and Freddie to an SWF may be a novel idea, but SWFs are already used across the country. Twenty states currently have SWFs, according to the Sovereign Wealth Fund Institute, and most are used for subsidizing their governments and public education systems.
An SWF would have the ability to raise capital from sources beyond taxpayer dollars and fund a diverse number of initiatives. This model could be appealing as a means to shore up Fannie and Freddie, which remain undercapitalized. The agencies’ combined capitalization is $150 billion, while the funds necessary for them to exit conservatorship are nearly twice that amount, according to Dave Borsos, vice president of capital markets for the National Multifamily Housing Council.
Sovereign wealth funds are typically capitalized through a mix of taxpayer dollars, a transfer of government assets to the fund or a borrowing of funds. Consequently, existing SWFs are often used for funding policy objectives outside the scope of private capital, such as shoring up global value chains or subsidizing climate change responses.
In a Feb. 12 paper published by the Peterson Institute for International Economics, however, the authors warned that SWFs should have a focused purpose—Trump originally stated the sovereign wealth fund could be used to purchase TikTok—and an accountable governance structure or else they may become vulnerable to special interests and poor investment decisions.
Increasingly plausible
Multifamily finance experts see value in privatizing the agencies.
“A private company could be more innovative, more flexible and more responsive to changing market conditions, which is what the private lenders and market lenders could value,” said Mike Fratantoni, chief economist & senior vice president of research and industry technology at the Mortgage Bankers Association.
Further, a privatization could be long overdue. “Many in the industry recognize that this conservatorship was never meant to be permanent, and the portfolios and balance sheets are much smaller so that there is not the same level of liquidity risk,” Fratantoni told Multi-Housing News.
What would privatization look like?
At the moment, it’s hard to predict the effects of privatizing the GSEs, whose assets total more than $7 trillion, since the plan has largely been verbal so far.
According to Brett Fawley, CBRE Investment Management’s director of research for Americas insights & intelligence, “the potential impact is hard to estimate without knowing how the privatization would be structured and capitalized.”
Fawley believes that an SWF to capitalize Fannie and Freddie is among the more realistic solutions, as it will allow the Treasury Department, which owns a roughly 80 percent ownership stake in the GSEs, more flexibility in reducing its shares without posing a credit risk to taxpayers. “An infinite-lived investment vehicle like an SWF gives those shares a viable forever home whereby the Treasury would have no pressure to wind down its position, and could pursue any potential shrinkage of its stake strategically without market pressures,” Fawley explained.
Essentially, it’s a step between complete privatization and the status quo since an SWF would likely be seeded in part through the Treasury Department’s stake in the GSEs, according to Fawley. But it also preserves the reliable government backstop. “Consider it conservatorship with optionality,” Fawley said.
Still, Fawley predicts that in the event of a privatization, financing costs, in the near term, would increase “to the extent that they were being publicly subsidized.” This could be unwelcome news for some investors, with commercial and multifamily mortgage borrowing and lending expected to rise 16 percent this year, to $583 billion, according to Fratantoni’s firm.
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Longer term, however, privatization could potentially lower borrowing costs due to “more private market competition, and financial and banking deregulation,” including the potential repeal of provisions of the Dodd-Frank Act, according to Fawley.
Jeff Adler, vice president at Yardi Matrix, agrees, noting HUD’s and the Federal Housing Authority’s roles would likely go undiminished in the event of a privatization under an SWF. Still, structure and accountability are everything. “Done well, (privatization) could provide a better rating of risk to cost and better market signals of the true cost of capital, while harnessing the scale advantages of the GSEs,” he said.
Adler also sees a unique benefit in eliminating some perceived politicizations of the agencies, which could be tweaked to align with a given presidential administration’s priorities.
“This does release the government from these contingent liabilities and avoids further politicization of the mortgage market in the future,” Adler said, pointing to the Biden Administration’s endorsement of national rent stabilization. “I view this as a long-term positive, with possible, although unclear, short-term costs.”
The approach is everything
As the plan unfolds, multifamily finance pros will be hoping the GSEs maintain what has made them an integral part of the multifamily and residential markets: the guaranteed payment on GSE securities even if the borrower defaults. If that is not in place, then capital costs could become more inflated as both lenders and borrowers price in additional risk typically found in other debt structures.
In releasing the GSEs from conservatorship absent a government backstop or under a poorly run, unaccountable SWF, Fratantoni’s concerns include impacts on lending rates, a lack of stability, liquidity issues and higher costs to the market for investors. “Having an explicit backstop … would provide investors with the comfort that they could stay in the market, and we want (them) to feel that agency and MBS are at the pinnacle of security.”
