Banking, finance, and taxes

Do Investors Think Fannie Mae, Freddie Mac Can Be Privatized Before Trump's Term Ends?

Bet_Noire / Getty Images

Shares of Fannie Mae (FNMA) and Freddie Mac (FMCC) gained more than 25% on Friday following a report that Mark Calabria, the head of the Federal Housing Finance Agency (FHFA), is pressing Treasury Secretary Steven Mnuchin to take the two government-sponsored entities (GSEs) private before January 20, the probable end of the Trump administration.

Calabria has pushed hard to privatize the two GSEs, and the Wall Street Journal reported on Friday that Mnuchin wants to create a path to privatization that would be difficult for an incoming Biden administration to unravel. Complicating matters further is a lawsuit on behalf of holders of shares in the GSEs that is on track for oral argument in the U.S. Supreme Court next month.

What Calabria and Mnuchin are reportedly discussing is how to reduce the federal stake in the GSEs or, alternatively, how to change the conservatorship agreement, giving the government control of the GSEs’ profits in exchange for a 2009 bailout.

Reducing the government’s stake in Fannie and Freddie would involve recapitalizing the GSEs and then opening them to private investors through an initial public offering. One significant issue with this path is that private investors who scooped up shares of Fannie and Freddie following the 2009 bailout want to be paid, not wiped out. That’s what the Supreme Court case is all about.

The other way to put more of Fannie and Freddie in private investors’ hands is to write off the government’s $220 billion in preferred shares that currently put the Treasury first in line for any profits from the GSEs. This solution is opposed by some lawmakers. The Wall Street Journal noted a letter to Mnuchin and Calabria last month from Democratic Senator Mark Warner and Republic Senator Mike Rounds claiming that U.S. taxpayers should receive fair market value for whatever they give up: “Any other means of reducing their investment would be tantamount to a transfer of wealth from the taxpayers who stepped in to save [Fannie and Freddie] to private investors looking for a windfall.”

The one thing that no one seems prepared to put at risk is the safety of the GSEs’ mortgage-backed securities. Although there is no explicit guarantee that the federal government will backstop these securities against default, the 2009 bailout indicates how the government will react when the chips are down. With some $6.6 trillion in assets, Fannie and Freddie are indeed too big to fail.

Fannie Mae stock added more than 25% on Friday to close at $2.35. Monday morning, the shares traded up another 17.5% at $2.76.

Freddie Mac shares added nearly 29% on Friday to close at $2.27 and added more than 16% early Monday to trade at around $2.65.

ALERT: Take This Retirement Quiz Now  (Sponsored)

Take the quiz below to get matched with a financial advisor today.

Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests.

Here’s how it works:
1. Answer SmartAsset advisor match quiz
2. Review your pre-screened matches at your leisure. Check out the advisors’ profiles.
3. Speak with advisors at no cost to you. Have an introductory call on the phone or introduction in person and choose whom to work with in the future

Take the retirement quiz right here.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.