Fannie Mae and Freddie Mac could be exiting conservatorship by year-end. The current administration has put forth a plan for a $30 billion IPO before the end of the year to bring new capital into play and begin privatizing the GSEs.
While no official action has been taken, the outsized offering would be the largest IPO ever in the U.S. However, that’s “a drop in the bucket” compared to the total worth of these two mortgage lenders and would have virtually no impact on borrowers or investors, according to Dave Borsos, vice president of Capital Markets and Student Housing at the National Multifamily Housing Council.
Privatization, though, could have its ramifications.
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How quickly could privatization occur
The GSEs have a projected $7 trillion in single-family mortgages and $1 trillion in multifamily mortgages on their balance sheets. So, to completely privatize Fannie and Freddie would take years, Borsos suggested, noting that while private investors own 1.2 billion in common shares, the federal government owns warrants equal to 7.2 billion shares, which represents about 80 percent of Fannie and Freddie stock.
NMHC supports Fannie and Freddie continuing to function as they do today, which is ensuring liquidity for multifamily mortgages nationwide.
“They play a major role in trying to address the housing crisis that we face, whether it’s providing capital or investing in low-income housing tax credits,” Borsos said, “So it’s important to define what privatizing would mean. Would it affect their mission?”
Taking the GSEs out of conservatorship also introduces a level of risk that doesn’t exist today. “Privatization swaps a government safety net for a market trampoline—higher jumps, harder falls,” contended David Frosh, CEO of Fidelity Bancorp Funding.
With privatization, borrowers could expect higher funding costs, tighter credit standards, more volatility and pro-cyclical lending, he added, noting that capital is abundant in booms, scarce in downturns.
“Depending on how much risk the government absorbs going forward, take away the shock absorbers, and the ride gets faster—until the first pothole,” Frosh commented. “Liquidity in downturns is the GSEs’ superpower. Without them, market depth thins when stress hits, amplifying cycles.”
The market could also expect to see wider spreads, higher risk, lower leverage and a shift of power toward balance-sheet lenders and debt funds, Frosh said, noting that, with an increase in risk and spreads, investors would demand higher yields, pushing mortgage rates higher and reducing origination volumes.
He also suggested that the investor base would narrow as some traditional buyers step back and are replaced by yield-focused credit funds, creating a thinner, more volatile market.
From a multifamily investor’s view
Marc Gordon, principal, co-president & CFO at Investors Management Group, said he would like to see these lenders remain quasi-governmental agencies.
In addition to keeping interest rates down and housing more affordable, Gordon noted, that the GSEs offer multifamily borrowers and lenders a range of other advantages that could look very different if privatization were to happen.
These include closing certainty: Loans generally close on the same terms outlined in the application, and borrowers can lock rates for 30 to 60 days at little to no additional cost.
“That certainty is critical for any real estate buyer, and particularly for our Tenant-in-Common platform, where finalizing debt-to-equity ratios early is essential,” Gordon said.
By comparison, Gordon noted, CMBS, debt funds and other lenders often don’t provide the same level of assurance when it comes to certainty of close and final terms.
Fannie and Freddie also provide relatively simple, standardized documentation, which lowers the time, energy, and legal costs involved in closing compared with CMBS, debt funds, or many other lending sources, he said.
Also, under FHFA conservatorship, Gordon noted, there is greater understanding of market conditions and a willingness to make appropriate adjustments. “The best example is at the start of COVID-19 these agencies very quickly rolled out a streamlined and fair forbearance program that kept countless properties afloat when rent checks stopped coming in—something other lenders did not do,” he said.
Impact on capital availability unknown
Prior to 2008, Fannie and Freddie were publicly traded private companies, but they were also government-sponsored entities chartered by the federal government to provide liquidity to the secondary market for both single family and multifamily mortgages.
“So if we’re talking about privatizing, meaning returning to that same situation, then they’re restricted to what their charter said they could do prior to going into conservatorship, and without congressional action, that is basically what they would be allowed to do,” he contended.
While many people have the impression that Fannie and Freddie mortgages are guaranteed by the federal government, Borsos emphasized that there was no government guarantee before they went into conservatorship, and there is none now. He noted, however, that if these entities are in need of financial support, the government is likely to step in again.
But how privatization would change mortgage lending or availability of capital for multifamily or home mortgages is still an unknown. What form the transition of the conservator to regulator would take or what FHFA would regulate and allow Fannie and Freddie to do is also open to debate.
“It’s a bit difficult to say, but it really is going to be constrained by what they are fundamentally and primarily founded on, and that is to be providers of liquidity in secondary mortgages for both single-family and multifamily markets,” he added.
If a privatized Fannie and Freddie start to resemble other purely market-driven lenders, many of the advantages investors and borrowers rely on today could erode.
“At the end of the day, any move toward privatization should be weighed against the stabilizing role the agencies have played: keeping capital accessible, reasonably priced, and steady even in the toughest market environments,” Gordon said.
The impact of privatization, however, would likely depend on negotiations between the regulators and Fannie and Freddie. “For instance, today, there are affordable housing guidelines that they operate under,” Borsos said. “Some of them are driven by statute, and others are at the request of the director of FHFA.”
Privatization and affordability?
“My fundamental feeling is that because of what those companies do, and what role they play, there may be some adjustments on affordability or other things like that, or they may pullback on something unprofitable or that takes up a tremendous amount of resources for the return,” Borsos added. “But I do think that the general underpinnings of the role they play today would survive into a privatization or ending of conservatorship.”
Frosh noted that privatization would likely raise entry costs—higher spreads, stricter debt-to-income tests, and fewer low-down-payment programs in downturns.
“If affordability is explicitly funded through targeted subsidies or fees on MBS, support for low- and middle-income families could become more durable and transparent than today’s cross-subsidies,” he said. “And If the government does not fully support higher-risk loans, these families could be permanently removed from achieving the American dream of owning a home. Affordability doesn’t vanish overnight; it erodes spread by spread.”
Will releasing the GSEs spark competition?
There are those that say a fully private, no-backstop model could spark short-term competition, potentially lowering rates for prime borrowers during boom times and enable faster credit decisions.
Additionally, Borsos noted, that while Fannie and Freddie would continue to be constrained by their charters, ending conservatorship also would allow them to innovate around loan products, service, and technology in terms of how things are processed.
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