President Trump has indicated that he is seriously considering taking the mortgage giants Fannie Mae and Freddie Mac private through a significant public offering. These entities have been under government control for over a decade now.
Experts point out that this could put considerable pressure on the US government. Yet, they also caution that it might lead to higher mortgage rates, making the situation regarding housing affordability even more challenging.
“Fannie Mae and Freddie Mac are performing really well and generating substantial cash. The timing seems favorable. Keep an eye on this,” Trump mentioned in a post late Wednesday.
He noted that he plans to consult with Treasury Secretary Scott Bescent, Commerce Secretary Howard Lutnick, and William Plute, the head of the federal housing finance agency, before making any final decisions.
These companies play a crucial role in the housing finance sector by buying mortgages from lenders and packaging them into mortgage-backed securities. Since the 2008 financial crisis, Fannie Mae and Freddie Mac have been under government conservatorship, which has involved the US expanding its credit line and overseeing their operations.
By 3:15 PM ET, shares of Fannie Mae and Freddie Mac, also known as the Federal National Mortgage Association and Federal Mortgage Co., surged, reaching increases of 41.5% and 40.9%, respectively.
The US government has profited over $250 billion, and James Thorne, chief market strategist of Wellington Altus Private Wealth, estimates that selling shares of both companies could wipe around $8 trillion from the federal balance sheet.
“I think they’re looking for funds,” remarked Chris Warren, Chairman of Wheeler Global Advisor. “The discussion about this is likely rooted in the need for cash to support tax cuts and budget adjustments.”
The GOP budget proposal includes a hefty tax cut projected to swell the deficit by about $3 trillion over the next decade. The House narrowly passed the bill early Thursday, forwarding it to the Senate.
Privatizing Fannie Mae and Freddie Mac might also benefit Trump’s associates, like billionaire Bill Ackman, who could reportedly net $1 billion from his investment, banking on stocks rising if Trump opts to take them public.
He reacted positively to Trump’s social media announcement, sharing approval emojis on Thursday.
Billionaire hedge fund manager John Paulson, known for his substantial stake in the mortgage giants, also echoed sentiments about the necessity of freeing them from government oversight now that reforms have been implemented.
“It makes sense for policymakers to release them from conservatorship at this point,” stated Paulson’s spokesman. “The government stands to gain the most from such a release.”
However, bond investors have expressed concern about the potential impact of the associated risks, leading to rising long-term yields. The Treasury yields for 30 years climbed to 5.068% on Thursday.
Additionally, investors might hesitate to purchase mortgage-backed securities if government intervention decreases, likely demanding higher yields as compensation.
Since yields are closely tied to mortgages and various loan interest rates, this shift could spell considerable profit for the government while causing increased costs for consumers.
According to investor surveys, rates could rise by more than 0.5 percentage points.
Earlier this week, at a Mortgage Bankers Association meeting, Pulte suggested it might be time to put the “bloated” Fannie Mae and Freddie Mac “on a treadmill.”
As far as the control over these mortgage giants remains, this seems to align with Trump’s agenda, as he pointed out: “This will be done with the American people’s best interests in mind, but ultimately, the decision lies with the boss.”
In February, Bescent mentioned that the choice to privatize would depend heavily on the repercussions on mortgage rates.
“The key indicator I’ll be watching is any signs that mortgage rates might rise,” he told Bloomberg.
