This week President Trump made a long -awaited announcement on the Federal Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Trump on Tuesday wrote In a social contribution of the truth: “I work to bring these amazing companies to the public, but I want to be clear that the US government will keep its implicit guarantees and I will remain strong in my position to monitor them as president.” While part of his proposal solid IST-Diese both companies funded by the government (GSES) should actually be removed from the conservative of the Federal Housing Finance (FHFA).
The GSEs have been under the FHFA conservatory since September 2008 when their bankruptcy quickly led to a wider financial crisis. They remain a unique force in housing construction. Fannie and Freddie currently keep mortgages of more than 7 trillion dollars. Most of these mortgages have financed purchases from single -family houses and make up about half of all of these finances. The GSEs also offer about a third of the multi -family mortgage financing.
Privatization is an enormous opportunity that is also released with risks. A conversation about starting the privatization of Fannie and Freddie means that they have returned to health and think about the greatest public equity in history. But Fannie and Freddie remain fragile, and small changes in the structure of a privatization contract can endanger hundreds of billions of dollars. A poor execution can suspend future bankruptcies for taxpayers and, through mortgage financing and capital markets, unexpectedly reverberated. It is worth taking the time to do the details correctly.
The binding of the Americans to the GSES is based on the desire for cheap mortgage financing. The GSEs are widely attributed to the production of 30-year-old, solid mortgages with a firm rate that are widespread at low costs. This is not internationally the norm where floating interest rates, shorter terms and advance payment sentences are more common characteristics. The GSE mortgage structure reduces monthly payments and transmits the interest rate risk of borrowers to lenders.
Large advantages
Private mortgage providers have firmly accepted the mortgage structure of the GSES and provided funds provided at a comparable price. The difference in the interest rates between privately signed “Jumbo” mortgages, which are too large for the GSEs and otherwise identical “compliant” GSE mortgages, has only 6 basis points (0.06 percent) in the past five years, albeit with thresholds of 60 to 70 basis points in both directions. It is therefore not obvious that the continued existence or prices of 30-year-old mortgages depend on the GSEs with a firm rate.
Since 1992 the FHFA has been obliged to determine annual housing goals for the GSES. These goals usually set threshold values for the availability of mortgages using equity criteria such as geography and household income. Borrowers who cannot otherwise fulfill the underwriting criteria of the GSEs can qualify for mortgages through these programs. However, it is not clear that these programs offer more advantages than other state housing programs or the activities of the Community Reinvestment Act of private banks.
Nevertheless, the GSEs enjoy significant legal and regulatory advantages over the regulated financial system. The GSEs are neither chartered as banks nor obliged to meet bank -prudial standards. The required capital is far less than the required balance sheet balance loan or private securities. They increase the debts on favorable conditions due to their proximity to the government. The Federal Reserve and the Banking System are held in debt and mortgage billions (MBS), in which the regulations are far less risky than comparable debt obligations. This combination of light touch regulation, leverage and cheap finances made it possible for the GSE to swing a large part of the mortgage market for living mortgages from the 1980s to 2008.
When the GSEs failed in September 2008, it became clear that they had not increased finances cheaply because they were superior risk managers, but because investors had rightly expected that the US Ministry of Finance would resolve them in a crisis. The Ministry of Finance has committed hundreds of billions of capital to GSEs, received primary preferential shares and guarantees that they acquire 79.9% of their regular shares. The exercise of these arrest warrants gave state art responsibility and control over the GSEs, with which all GSE profits were led to the Ministry of Finance.
The GSEs have returned to profitability, but their finances remain precarious. At the end of 2024, Fannie worked with a 46 -way lever, while Freddie was 57x (the largest banks are effectively limited with 20 times). In order to reduce their leverage to an appropriate level, the GSEs have to more than double their equity, which will take about a decade in their current profitability rate.
Bill Ackman
Bill Ackmans Pershing Square holds 2% of the equity of Fannie Mae and Has a plan for privatization of the GSES This is well calibrated in our current political moment. In Ackman Presentation “The Art of the Deal” From the beginning of this year, Obama and bidges are the villains that steal the GSE and their profits while Trump is the hero who can save them.
Ackman’s plan pays lip fighting to contain the advantages enjoyed by the GSES, but most of them leave the details of his plan. He wants the GSEs to remain outside the area of bank regulation and use free leverage. He likes the privileges, the GSE securities in the Fed and in bank balance. He wants to formalize a government deficit of the GSES as a kind of reinsurance agreement, but these decisive details are left to the imagination.
Ackman is interested in the fact that Trump 2.0 achieves privatization through Executive Action. Since the statutes that enable the role of the GSEs in the housing directive cannot be canceled by the executive, the role of GSEs would leave the future in the future housing policy unresolved. The need for legislation on this question requires reading the congress about all privatization plans. It would be stupid that the Ministry of Finance is giving away the profits of the GSES and at the same time maintaining the tail risk.
There is no reason why the GSEs cannot compete as private companies as private companies. However, it would be ruthless to privatize the GSES with a complete addition to the state -subsidized advantages in the willingness to supervise, the financing conditions and disaster insurance. The GSEs should compete and survive with the same conditions as other regulated financial companies.
No fire sales prices
In order to bring them to the scope of the regulation of supervisory law, the GSEs should be recharged as financial holding companies and described systemically important institutions, which subjected them to monitoring and regulating the Federal Reserve. The GSES is expected to maintain an appropriate level of capital and manage risks according to Best Practices. Why should you be liberated?
The GSEs also have to give up their financing advantages. The Federal Reserve should treat the debt and the agency -MBS like its colleagues in the private sector by selling agency obligations in its portfolio and foregoing future purchases. In a similar way, bank capital provisions should apply the credit risk weights to the agency’s obligations without prejudice.
Privatized GSEs should not be available to the government as political instruments. Divorce is necessary to the claim of GSES for public support in future crises. Giving in the GSES does not require the task of the apartment guideline, which is also pursued by several other agencies. An act of the congress that ends the GSE’s place in the apartment directive is essential.
The proper preparation of the GSEs for privatization will take several years to consolidate their finances, to repeal their footprint in the regulated financial system and to decouple their obligations from the Fed’s balance sheet. When the preparations have been completed, the sale of hundreds of billions of GSE -own -owned capital has been executed for years. The impossibility of an investor who has achieved a controlling share makes it even more important to build up a robust corporate government, processes and controls before a public application.
Competently guided, regulated and privatized GSEs will be profitable, but also much smaller than 2008. Privatizing, recharged, regularly regulated GSE will bring in significant funds for the government, reduce the risks for future budgets and compete with the rest of the financial system on a flat playing field. There is no economic reason why the Trump administration should quickly pursue a privatization process, and the congress should not allow the GSEs or other valuable assets of the government to be unloaded for short-term political advantages.
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