Is Trump's consideration of privatizing Fannie Mae and Freddie Mac an investment opportunity or a concern that will drive up mortgage Intrerest Rates?

Recently, a post by U.S. President Trump has once again brought Fannie Mae ( and Freddie Mac ) into the spotlight. Trump stated that he intends to return these companies to private enterprise and relist them, but promised that the government will continue to act as a backstop for these two entities. This statement triggered a big pump in the stocks of both companies, but also raised concerns among many that this will cause mortgage interest rates to rise, making future home buying more expensive.

What are Fannie Mae and Freddie Mac?

In 1938, the U.S. Congress established Fannie Mae (Federal National Mortgage Association) to revitalize the American real estate market after the collapse during the Great Depression. Thirty years later, the government established an almost identical institution, Freddie Mac (Federal Home Loan Mortgage Corp.).

Both companies purchase home loans from banks and other lending institutions, bundling them into securities to sell to investors, known as subprime mortgages (Subprime Mortgage). Fannie Mae and Freddie Mac subsequently guarantee these securities, protecting investors in the event that homeowners default on their loans. These methods provide more funding, making it easier for homebuyers (, especially low- and moderate-income families (, to obtain loans. According to data from the National Association of Realtors )NAR(, Fannie Mae and Freddie Mac account for about 70% of the U.S. mortgage market.

For decades, Fannie Mae and Freddie Mac have operated as privately owned, wholly owned companies. Even so, due to implicit government support, investors consider the mortgage-backed securities of these entities to be among the safest assets. Essentially, the buyers of these securities are willing to accept lower Intrerest Rates because they believe the U.S. government will never let these important institutions fail. This was confirmed during the subprime mortgage crisis in 2008.

In the 2008 subprime mortgage crisis, Fannie Mae and Freddie Mac were taken over by the government.

In 2008, the subprime mortgage crisis triggered a financial tsunami, a large number of subprime mortgage )Subprime Mortgage( defaulted, and Fannie Mae and Freddie Mac began to suffer huge losses. U.S. housing prices have plummeted, and homeowners have begun to default on their loans. Because Fannie Mae and Freddie Mac guarantee the securities bundled with these mortgages, they are obligated to recover losses. Their own investments have also suffered losses and are on the verge of bankruptcy.

The Federal Housing Finance Authority )FHFA( was created to regulate troubled mortgage companies, and it orchestrated the largest bailout in U.S. history — totaling $191 billion, funded by taxpayers. In return, the government became the de facto owner of Fannie Mae and Freddie Mac, controlling about eighty percent of the shares. The original shareholders' investment was all but wiped out, and in 2007 the share price fell to a few cents at about $65 per share. Under the terms of escrow, private shareholders do not exercise any control and do not receive any dividends.

In 2010, due to the stock price failing to meet the minimum requirement of at least 1 dollar for 30 consecutive trading days, these companies were delisted from the New York Stock Exchange. These companies are currently trading in the form of over-the-counter stocks.

Bill Ackman bets on the privatization of Fannie Mae and Freddie Mac

Bill Ackman, a well-known hedge fund manager, has a long-standing interest in Fannie Mae and Freddie Mac. He has publicly stated that the two companies have improved their capital positions and are likely to perform relatively strongly in the face of a sluggish U.S. housing market. In addition, he expects that the U.S. government may end the regulation of the two companies, making them private again, and his hedge fund, Pershing Square )Pershing Square(, continues to increase its stake in both companies.

According to Keefe, Bruyette & Woods analyst Bose George, although the process is complicated, Fannie Mae and Freddie Mac's privatization does not require congressional approval unless the company's charter needs to be amended.

However, investors holding shares of Fannie Mae and Freddie Mac still face many obstacles before reaping substantial returns. If these companies attempt to raise the necessary funds through an initial public offering, the shares of existing shareholders will be diluted. Furthermore, although these companies have returned over $300 billion in profits to the Treasury since the bailout, far exceeding the initial taxpayer investment, they still owe the government a significant sum under complex custodial rules, which must be resolved before they can exit government control.

What are the pros and cons of the privatization of Fannie Mae and Freddie Mac?

Some critics say that privatizing Fannie Mae and Freddie Mac could make home buying more expensive. If investors begin to believe that the government's implicit support for Fannie Mae and Freddie Mac has weakened, the likelihood that investors will demand higher premiums to account for increased credit risk will rise, which could lead to an increase in mortgage interest rates.

Many supporters of the privatization of Fannie Mae and Freddie Mac argue that this will introduce beneficial competition into the real estate market. They also believe that it will properly transfer the risk of failure from taxpayers to private investors.

Privatization supporters also point out that although the federal government’s regulation of Fannie Mae and Freddie Mac was initially just a temporary measure, it has continued for 17 years. They argue that Fannie Mae and Freddie Mac have returned to stable profitability, and after privatization, the government can generate revenue by periodically selling its controlled shares in the market.

Fannie Mae and Freddie Mac's stock prices were hovering around one dollar more than six months ago, but recently they have risen to 10.78 and 7.1 dollars, respectively. However, there is still a long way to go from their peak periods of 70~80 dollars.

This article discusses whether Trump's consideration of privatizing and listing Fannie Mae and Freddie Mac presents an investment opportunity or raises concerns about increasing mortgage interest rates. Originally appeared on Chain News ABMedia.