Even before Donald Trump was elected to a second term, multifamily and finance industry insiders had spent months discussing whether another Trump administration would finally take Fannie Mae and Freddie Mac out of conservatorship. Two things most agree when talking about privatizing the GSEs is that exiting conservatorship would be a complex undertaking and that it would likely take several years to complete. There is less agreement on the best route to that exit. Different reform efforts, current and previous The Wall Street Journal reported in mid-September that Trump allies, including Larry Kudlow, former director of the National Economic Council during Trump’s first term, and bankers were discussing plans to have the government sell most of its stakes in the GSEs, which are valued at hundreds of billions of dollars. The goal was reportedly to sell to investors, including sovereign wealth funds. Under the plan floated by Trump’s allies, the Treasury Department would partially back some of the Fannie and Freddie loans, similar to how the Federal Deposit Insurance Corp. backs a certain amount of bank deposits. It would also be similar to the implicit pre-2008 guarantee that became explicit under conservatorship. The WSJ reported that such discussions started in the spring and included conversations with investment managers on how the deal could work. The talks also considered various pathways to privatization, including going through Treasury and the Federal Housing Financing Agency, rather than Congress. Previous reform efforts, including some initiated by Congress and another led by former Treasury Secretary Steven Mnuchin, and Mark Calabria, the FHFA director, late in Trump’s first term, failed to get across the finish line. The Biden administration had their own list of priorities and didn’t pick up the baton. “They’re mindful of it,” Bill Killmer, chief lobbyist & senior vice president for legislative and political affairs at the Mortgage Bankers Association, told Multi-Housing News. “They field questions about it. But it’s not risen to a level of priority that it would need to if you’re going to try to attempt this conservatorship exit.” By contrast, Killmer said that in a second Trump administration, “There really is a chance that an examination of this kind of project with the GSEs will be renewed at the Treasury Department and with whoever occupies the directorship at FHFA.” The FHFA sets both the capital requirements and standards for Fannie and Freddie, so the FHFA leader will be a key player in any exit strategy, along with the Treasury secretary. Calabria, currently a senior advisor to the Cato Institute, has made it known that he is interested in a Treasury position where he could be involved in such negotiations between Treasury and FHFA to end conservatorship, according to Dave Borsos, vice president for capital markets at the National Multifamily Housing Council. Killmer said that an MBA blue-ribbon task force representing both the multifamily and single-family sectors has been meeting for about nine months to look at the practical implications of ending conservatorship. “We really kickstarted that effort again to take stock of reforms that had been executed administratively over the last couple of administrations and see what progress had been made, and also lay out the parameters of what would need to be done on the multifamily and single-family side,” he said. After hearing from members of Congress prior to the election that ending conservatorship would be one of their priorities in 2025, Borsos pulled out his GSE reform directory with a variety of proposals “Going back and reading that again this week, there were 49 things that the Treasury planned to focus on, things that were separately identified for releasing the GSEs,” he said. Of those 49 issues, 31 were administrative and could be accomplished without congressional actions, whether by an executive order or negotiations between Treasury and FHFA. Importance of the PSPAs Freddie Mac headquarters. Freddie Mac headquarters. Image courtesy of Freddie Mac While that path would largely exclude Congress, Killmer said he expects the action will be driven by the executive branch with Congress reacting. “It can’t be done solely by executive order or administrative action, in our estimation as industry practitioners, experts, and the way we’ve leaned into this,” Killmer said. “That’s because this conservatorship is governed by the Preferred Stock Purchase Agreements, which were put in place during the Obama administration.” When the government agreed to bail out the GSEs and set up the conservatorship, the PSPAs specified how Treasury would support Fannie and Freddie through senior preferred shares, which are owned by the federal government; junior preferred shares, which are owned by private equity firms, and common shares. The government also has the right through warrants to purchase up to about 80 percent of the common stock. Borsos believes that the first steps will be renegotiation of the PSPAs by Treasury and FHFA. “They’ve got to figure out what to do with all of those,” he said. “That’s one of the major complicating factors for the [release] from conservatorship.” Key questions, he noted, would be: Do some PSPAs get translated into equity? Do you forgive some stock? And what do you do with all the junior preferred shares, since they are held by entities outside the federal government? “We think that, number one, you’d have to restructure the commitment under the PSPAs,” Killmer said. He noted that Congress would need to provide a permanent, paid-for federal government backstop for the mortgage-backed securities, including multifamily MBS. That would give investors the assurance that in exiting the conservatorship, the full faith and backing of the government is explicitly tied to the GSEs’ MBS.
