Will Donald Trump sell Fannie Mae and Freddie Mac? If so, why? To whom? For how much? And how will it affect you?
There has been a lot of noise the last few years about privatizing Fannie Mae and Freddie Mac (the agencies), and yet nothing has been done about it. We’ve talked about the “why” nothing has been done before.
Will the Trump administration change course on this very important topic?
According to Donald Trump’s pick for Treasury Secretary, Steve Mnuchin, yes. In an interview with Fox News Mnuchin made it clear he intends to
private the agencies as soon as possible. Mnuchin based his point of view on the principle that “(government) is not the right way to allocate capital.” “We’ll get it done reasonably fast,” he added.
As I’ve written before, however, he may have trouble getting it through Congress. All profits from operations of the agencies currently are sent to the U.S. Treasury, to pay back taxpayer bailouts during the financial crisis. As of the end of the third quarter of 2016 Fannie Mae has paid back $154.4 Billion, against a bailout of $116.1 Billion. Not bad.
As of the end of the second quarter of 2016, Freddie Mac had paid back $99.1 Billion against a bailout of $72.3 Billion.
Keep in mind, the U.S. Treasury still owns a large majority of the companies, and there is equity – probably in the tens (maybe hundreds) of billions – in that stock.
Why haven’t the companies been privatized already? As I’ve written before, the billions of dollars paid every quarter to the Treasury – money that does not feel or smell like a tax and does not have to be earmarked for any specific purpose – has been hard for Congress to let go of.
But now with a new administration and a friendly Congress, could something happen? Maybe.
The question in my mind, is who will stand guard to make sure that taxpayers get a fair price if the companies are indeed sold? Mnuchin is a Wall Street fixture with many friends in investment banking. How will the new administration (and Congress) ensure that the companies are not given away for pennies on the dollar in a sweetheart deal?
Mnuchin didn’t address that question in his interview with Fox, because it wasn’t asked. But I’m hoping someone does very soon.
How will this affect you?
Because the government explicitly guarantees the return for investors of mortgage-backed securities issued by the agencies, they are able to offer wholesale interest rates at remarkably low levels, which translates to low mortgage rates as you’ve seen for the last few years. Mortgage-backed securities issued by investment banks today have a much higher yield than agency bonds, and as a result interest rates on “jumbo” or non-conforming loans are much higher than those for conforming (agency) loans.
The interest rate market is a complex beast anyway, and there are many factors that will drive interest rates over the coming few years. But if the Trump administration and Congress can agree to privatize the agencies, look for a big change in the products and rates offered to you. Translation: Higher mortgage rates!