What Does Fannie-Freddie Privatization Mean For Investors?

Fannie Mae and Freddie Mac could be headed to privatization very soon. What can investors expect?

The White House has proposed pushing mortgage giants Fannie Mae and Freddie Mac into privatization again. It’s a big move that could have a big impact on the nation’s mortgage and real estate market, and even help bolster incoming international investment and foreign economies who invest in them.

The How, What & Why of Privatizing Fannie and Freddie

These GSEs (Government Sponsored Agencies) were forced into government conservatorship with the mess of 2008. The received an almost $200B bailout from US taxpayers. Since then they have begun turning a profit, and have remained the glue for the countries lending system, and perhaps housing market and economy.

By releasing them and privatizing these giants which guarantee, buy and repackage residential and multifamily mortgage loan notes into mortgage backed securities (MBS), the hope is that taxpayers can be off the hook for bailing them out and a more competitive and stronger mortgage market can be built.

The current proposal would allow for other companies, lenders and insurers to compete with Fannie Mae and Freddie Mac and create a more vibrant mortgage market. It would also include an explicit form of guarantee of the scenarios in which the government would provide a bailout. Previously there was only an implied guarantee, which apparently worked very well.

Shares of these two organizations reported surge 3-4% on this news.

Opening Up the Mortgage Market

What’s really exciting about privatizing these organizations is the potential to open up and revive the US mortgage market.

The market has been starved of financing due to a lack of a secondary market and lenders’ confidence in making loans without incredible regulatory, financial and legal risks on the backend.

Privatization could change this. More MBS packagers can be in the market and fuel capital. Banks and mortgage lenders could find new confidence in residential lending and making loans with some guaranteed coverage.

This should mean the birth of new loan programs, more aggressive lending and more access to credit. Especially, as these factors should create ongoing growth in the US real estate market.

The Cons

Those who are against the move are concerned about ongoing subsidies for affordable housing, and taxpayers still being on the hook to bail these institutions out in a crisis. That will probably always be the case until the government is willing to let them fail. Some risk of failure could be reduced with greater capital requirements. Though the higher these requirements the less well this whole transition will work and actually grow the market.

Summary

The privatization of Freddie Mac and Fannie Mae is big news. It has big potential to fuel the market, create more paper assets to invest in and probably fuel better performance in mortgage notes and real estate sales. It may still be too early to tell how this will play out, and a lot will depend on the details, but it is positive.

Investment Opportunities

Find out more about investing in secured debt and real estate, go to NNG Capital Fund

Copyright Image: Fannie Mae - Freddie Mac, Scott Lewis