Trump's plan may impact future of Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac, the government-backed mortgage giants, may face privatization under Donald Trump's second term. This potential move could lead to higher mortgage rates in an already challenging housing market.

During his first term, Trump attempted to privatize Fannie and Freddie without success. Recently, some of his top allies have urged him to revisit this initiative after his upcoming inauguration.

Billionaire investor Bill Ackman, a Trump supporter who owns shares in Fannie and Freddie, has been vocal on social media about the need for their swift exit from government conservatorship. "Trump likes big deals and this would be the biggest deal in history. I am confident he will get it done," Ackman stated. He suggested that successful privatization could yield over $300 billion in profits for the federal government while removing $8 trillion in liabilities from its balance sheet.

Privatization would mark a significant change for Fannie and Freddie, which were established by Congress to provide liquidity to the secondary mortgage market. They were bailed out during the 2008 financial crisis with taxpayer funds in exchange for preferred shares held by the Treasury.

Realtor.com Chief Economist Danielle Hale predicts that ending conservatorship might increase mortgage rates due to the loss of a government guarantee backing investors if Fannie or Freddie encounter trouble. "Mortgage rates would likely move higher," she said, explaining that consumers currently benefit from lower rates because investors are willing to lend without demanding high-risk premiums.

Mortgage rates have risen significantly since Trump's previous term when they were near record lows at 2.8%. Now close to 7%, these persistently high rates pose challenges for homebuyers facing affordability issues not seen in four decades.

Ken Johnson, a housing economist at the University of Mississippi, agrees that privatization could raise rates further. He also warns of potential risks reminiscent of conditions leading up to the 2008 financial crisis if conservatorship ends prematurely.

Under current federal oversight, Fannie and Freddie operate with strict guidelines dictating their purchase and securitization practices. Privatization might allow more creative mortgage structures but also poses risks if standards become too lenient.

A spokesperson for Trump's transition team did not comment on his stance regarding privatizing these entities. However, recent guidelines released by the U.S. Treasury Department and Federal Housing Finance Agency outline a roadmap for exiting conservatorship—a move seen as an attempt by Biden's administration to manage any future changes under Trump’s leadership.

Many experts remain skeptical about ending conservatorship due to unclear benefits for consumers or governments alike: "Even if Trump 2.0 is able to end conservatorship," wrote Kunal Patel and Alex Shvartser from DoubleLine asset management firm founded by Jeff Gundlach; they noted potential execution risks affecting both primary/secondary markets adversely driving up primary mortgages significantly higher than current levels."

Johnson predicts delays before any decision on GSEs' status occurs until mortgage rate drops closer towards manageable levels around approximately four percent plus/minus range: “Everybody’s just going kick can down road,” he says wisely suggesting waiting until better timing arises before making such impactful decisions concerning these vital institutions within US economy today."