Mr. Pulte is now the great poohbah of Fannie and Freddie supervising the Twins from his seat at FHFA and also now acting as chair of their respective boards. What is he going to do (assuming he has any agency here)?
Among the tsunami of orders, presidential actions and findings ( I can, at least, get behind the undoing of the prior administration’s war on shower water pressure). There has been fresh talk about reform and release of Freddie Mac and Fannie Mae from their conservatorship. One might observe, at the outset, that release back into the private market is sort of embedded in the very notion of conservatorship (just ask Brittany Spears), but if that’s true, we’ve been kicking this can down the road for a very long time. Sentiment to finally release the GSEs from confinement first surfaced with any level of seriousness (every administration since 2008 has at least thought about it) in the first Trump Administration. He has returned to this theme in Trump 2.0 and the idea has been amplified by the miscellaneous chattering of sundry officials throughout Trump-land and in certain elements of the business community close to the White House.
Actual market participants, those who make a living in the space occupied by Fannie and Freddie, those who borrow, those who securitize and those who invest in the Twins’ production, have largely not been enthusiastic, albeit some have publicly expressed a certain amount of squishy ambivalence. This, of course, makes entirely good sense as market participants have done just fine whilst the Twins beavered away in their gilded cage. Folks in the residential and multi-family finance spaces understand that the Enterprises worked, and worked extraordinarily well. The little thought bubble over their head says, “Why fix what ain’t broke?”
It’s nearly impossible to handicap the likelihood of a release of the Twins from the conservatorship any time soon, nor what the agencies would look like post-release, but it’s certainly an interesting and consequential question.
If you’re in the commercial or residential finance space and haven’t been obsessing over the future of the Twins for these past 17 (17, yikes!) years, you must have been living under a rock. For those troglodytes who indeed have been living under a rock or for those whose attention has simply eroded by the endless static nature of the conversations around the future of the GSEs, a little history.
The conservatorship started in 2008. First, the FHFA was created by the Housing and Economic Recovery Act of 2008. Weeks later, FHFA triggered the conservatorship. In the crucible of the shit storm of the GFC, the government wasn’t particularly punctilious about crafting the plan on how the Twins were bailed out, putting certain niceties aside (the absent of which has caused considerable litigation in the ensuing years), but it worked and that was the important thing. Markets stabilized, lenders could lend, the folks could get mortgages and liquidity was adequate, both for the resi and the multi-family markets.
Ultimately, the government infused almost $200 billion into the Twins under its Senior Preferred Stock Purchase Agreement. The implied governmental backstop was preserved. In exchange, the government took preferred with a 10% coupon (subsequently changed to a dividend sweep which ended in 2019) and acquired warrants to acquire 79% of the common stock of the two Enterprises at a strike price of $.00001 per share. The warrants are exercisable and effectively assignable any time until September of 2028. (Note to everyone who cares, we’re running out of runway here. Assuming that date is real, but I actually rather doubt that.) That all worked, in the sense that the agencies thrived, their business continued to grow and within the confines of their conservatorship, the Twins continued to act like, well, Fannie and Freddie. Moreover, they have continued to repair their respective balance sheets now that the dividend sweep has ended.
Soon after the government hoovered up the Twins, a number of hedge funds and other private investors decided that the conservatorship would surely end (well, it did for Brittany), and concluded that at that point, the common stock would again be very valuable. They hoovered up almost 2 billion shares and acquired something in the range of $30 billion of pre-GFC preferred at bargain basement prices.
And then…nothing happened. Crickets. Getting understandably pouty over the ensuing years when the conservatorship did not end and began to look endless, considerable litigation ensued to validate the value of the common. All of that has amounted to very little, albeit some of that litigation detritus is still ongoing. (Note that notwithstanding those failures, the common currently trades at about $6 per share on NASDAQ. It’s a who’re you going to believe, me or your lying eyes type of thing, isn’t it?)
Today, the size of the GSE’s footprint in the CRE universe remains vast in both the resi and the multi-family sectors. Collectively, the GSEs currently guarantee over $7 trillion in mortgage debt, including almost 40% of the multi-family lending market. Freddie’s securitization output in the K program alone has in recent years exceeded conventional conduit securitization totals.
In the CRE market, their production totals for 2025 have been set at an aggregate $142 billion. That’s out of what the Mortgage Bankers Association forecast would be a total commercial lending book this year of $583 billion. That’s a Yeti-sized footprint.
And now we get to the new Trump Administration which has brought into the government several housing and banking executives with apparently preconceived notions about what to do with the Twins. These include Mr. Pulte as head of FHFA and his boss, Mr. Calabria at Treasury (who had been head of FHFA under the prior Trump Administration). These two, together with our new Treasury secretary, Mr. Bessent, have all been talking the talk of reform and release. Moreover, the eye of Elon and his DOGE-ers have turned to the GSEs. We really don’t have to guess what DOGE’s contribution to the conversation will be, do we?
One of the principal hedgies has recently proposed (and this is very consistent with what all of them have thought for a very, very long time) that the way forward is to:
- Deem the preferred paid and indeed the amount that has been returned to the Treasury is considerably more than the amount the Treasury infused into Freddie and Fannie in the first instance.
- Exercise or sell some of the warrants while recognizing the ownership interest of the companies’ equity. After full exercise, the legacy shareholders (i.e., the hedgies) would still own over 18% of the outstanding common.
- Do an initial IPO to raise a material amount of capital, perhaps as much as $20 billion for the two of them (and presumably dilute everyone else?).
- Eliminate the implied guarantee and replace it with a line of credit that would be large enough, based on ratings agencies modeling, to protect the AAA credit rating of the new entities’ mortgage-backed bonds. At least one of these definitive proposal suggests that’s worth a 25 bps fee…hmmm.
- Considering adjusting the G fee, presumably to continue to ensure adequate liquidity to the mortgage market (it’s really simple math here, the G fee goes up, the Twins are worth less, the G fee goes down, the Twins are worth more. Not sure how that will shake out).
- Pay market comp to executives (that’s actually a really good idea).
- Waive the current FHFA capital requirement for a bit and allow the Enterprises to operate and grow capital organically until they meet the FHFA capital minimums. Right now, the current net worth of the two is approximately $150 billion (which is about half of what FHFA has proposed).
These type of proposals have some academic support and considerate ideological support, mostly on the right (not to mention the hedgies who are looking to make a killing here). Some trade organizations have actually publicly thrown their support behind these ideas, although in a very much rabbit-in-a-hat sort of way. To the extent trade organizations have spoken about this, the bottom line seems to be they’re in favor of privatization provided it doesn’t screw up the markets, don’t widen mortgage spreads, doesn’t damage the TBA market and allows the Enterprises to maintain liquidity levels and continue to meet the FHFA scorecard goals with significant portion of the business devoted to mission-driven capital support (ok, let’s agree that mission-driven has become a very wide tent, but there’s still a bit of actual mission in there). With that sort of caveat, the support of those trade organizations which indeed have endorsed privatization, seems a tad enervated, doesn’t it? I’m all in favor of radical change…as long as it doesn’t result in radical change. (The financial equivalent of Catch 22.)
Before any of these notions goes further, of course, the knotty question, debated both in the halls of government and throughout the chatter-sphere is whether the Enterprises can be released through executive action, or whether legislation will be necessary. The answer to that might depend on what release means and what the resulting Enterprises actually look like. For a bunch of reasons, I rather think that legislation will be necessary. At a minimum, legislation will be needed to avoid the ping-ponging of dueling executive orders between the current administration and the next (and the next, and the next). Nonetheless, this Administration seems tenaciously attached to the executive order and my guess is that if release does occur, the Administration will struggle mightily to do so without going to Congress.
None of the proposals actually address why we have two GSEs and perhaps that thought has crossed the Administration’s mind recently with Mr. Pulte becoming chair of both Fannie’s and Freddie’s boards of directors and having largely completely repopulated the two boards with, presumably, like-minded new board members. While the two currently have significantly different business plans and approach a large number of issues in very different ways (and the market has benefited from the multiplicity of programs and the competition between the two Enterprises), it might occur to those at a certain remove from the actual work of the Enterprises, to question why there should be two on an ongoing basis (almost regardless of what might happen). Another issue that will have to be addressed if release happens.
So, does all this make it any easier to handicap the chances of a release? This Administration has shown considerable attachment for the Move Fast and Break Things school of management and surely we’ve seen evidence of that throughout Mr. Trump’s first 100 days. But will that inform the Administration’s approach to the GSEs? Obviously, Mr. Trump’s posture on tariffs is proof positive that Move Fast and Break Things is not always a risk-free endeavor. A lesson from the tariff imbroglio is that even Mr. Trump will blink if it becomes apparent that continuation of his policies will hurt his personal brand. Doing anything that would materially increase spreads, impair liquidity, change underwriting standards or see the Enterprises step away from the “mission part” of their business model would piss off a lot of folks (e.g., voters). Moreover, higher yields in the mortgage market could infect the broader Treasury market. If so, he would have another problem on his hands. (Remember, as James Carvell rightly said, “When I come back, I want to come back as the bond market.”). As clearly demonstrated by the recent and ongoing tariff brouhaha, even Mr. Trump can’t ignore the bond market.
So, I’m thinking that Move Fast and Break Things will not be the leif motif of the Administration’s approach to the GSEs. They really can’t risk being held responsible for diminished liquidity and blown-out spreads. The folks’, the voters’, reaction would get pretty nasty and that’s rather inconsistent with Mr. Trump’s notion of his legacy. The Babylon Bee recently reported (fake news), that Mr. Trump had assured everyone that all would be good by the beginning of his third term. The negative externalities of screwing up the GSE market would put paid to any third term fantasy I suspect.
On the other hand, there is indeed a lot of support, at least ideologically for privatization. Indeed, there is certainly a world where privatization could work. If enough capital is brought to bear, if a mechanic is established to preserve the ability of the Enterprises to issue AAA paper, well, it could work (as it worked before the conservatorship). An argument can be made (and has been made) that a release that results in moderately elevated spreads would be good because it would eliminate the price distortion from ongoing government ownership of the Twins. Beyond the macroeconomics, if that were the case, it would obviously be terrific for conventional market lenders who have always grumbled about competition from Fannie and Freddie. But again, the Trump-ian grandees will be keeping an eye on those damn voters.
Could the White House sell this to the folks as part of the narrative of temporary pain for long-term gain? That would be a really heavy lift. But on the other hand, the hedgies are close to the Administration and the Administration is inordinately fond of BIG IDEAS regardless of the realities and often regardless of the perils. Privatization would be a win for the hedge funds and private investors holding Fannie and Freddie common and we know that the current Administration (like all of them, frankly) likes to do good by its friends.
Can we deduce what the Enterprises would look like in private hands? Hardly. However, among the things that will or might be true in private ownership 2.0 include:
- The government won’t go away entirely. Whether there’s an implied guaranty, an explicit guaranty (oh boy, what damage that would do to the government’s balance sheet), or some sort of warehouse, something will have to be done because I cannot imagine the two Enterprises building up enough capital to support their operations without that type of backstop. Consequently, the two Enterprises will never be entirely private and never be entirely divorced from the governmental teat.
- Might, instead of reform and release, we just see reform? Could the preferred be cancelled, the warrants exercised and little or nothing else happen for a while? Test drive that, baby, and return to the actual release notion in a few years.
- Might there be one Enterprise? Will we see two Enterprises, or could there actually be more than two in certainly a senseless effort to create competition? (There are eleven home loan banks after all.).
- The mission commitment of the Enterprises is likely to be under considerable pressure as private return clashes with the embrace of public virtue. But if the government still providing some sort of a backstop, there’s a good case to be made that the mission will remain intact.
- On the other hand, might this Administration look to shrink the Enterprises’ regular way profitable stuff and instead focus in a more laser-like way on the mission (a thought courtesy of Mr. Zach Fox at CMA)?
- Might there be scope creep? Could the Enterprises step beyond the narrow remit of residential and multi-family mortgage assets? Could there be a geographic creep? Might we finance homes in the 51st state or in Greenland, for instance? Might the agencies think about financing other asset classes? None of that seems likely, but perhaps we’ll see some baby steps such as getting aggressive in the SFR space, which has been something of a political no-fly zone for a while.
- Underwriting standards could change. If the Enterprises acquire more of a ROE ethos, might underwriting, particularly in some of the mission type arenas be under considerable stress? Might the Enterprises assume more risk, reduce its CRT program and stretch for higher returns? GFC 2.0 anyone?
- Might the Enterprises return to the honorable business of lobbying and become more active participants in Washington mud wrestling?
- To the good, removing the compensation caps will permit the two Enterprises to compete even more aggressively for talent and more accurately align executive talent with entrepreneurship.
So, no great reveal here. We’ll have to wait and see. But unfortunately, even the waiting and seeing is not without its own price. The uncertainty wave front that is created by all the noise around the GSEs right now, coupled with major changes in their executive leadership and staff reductions across the two GSEs, could impair production and effective functionality until all is resolved. Q1 has been fine, but can that continue? With the Enterprises under fire with DOGE stomping around, with some of its experienced leadership gone and the drumbeat of radical change getting louder and louder, it might be a tough year ahead of us.
So, net/net, privatization might happen…but again, perhaps not. There’s a world in which it would work (but, of course, one might observe that it works reasonably well right now). At a minimum, it’s going to be extraordinarily disruptive.
The industry will get through this, no matter what happens, but it does rather feel like there is a looming possibility of a self-inflicted wound.