Fannie & Freddie: Follow-Up

Today FHFA director Bill Pulte gave an interview on CNBC that either clarified or confused things more on Fannie and Freddie. He made a point to say that they aren’t privatizing them. They are just taking them public.

https://www.cnbc.com/video/2025/05/28/fannie-mae-and-freddie-mac-could-be-worth-trillions-of-dollars-says-chairman-bill-pulte.html

Basically, what he appears to be describing is simply selling off some of the government’s preferred shares. This is akin to selling a toll road. It’s just trading future cash flows for an immediate cash windfall. This is different than the full privatization I assumed in the previous post.

I suppose that would be fine. It would lower the current stated federal debt in exchange for higher future debt. But it wouldn’t necessarily have a significant effect on the American housing market.

The interviewer asks, “Why… How does it help homeowners.” I’ve typed and deleted several attempts at describing his answer. I think it’s best to just let you watch.

But, some “Art of the Deal” optics will surely be less risky than purposeful restructuring, so “let the baby have its bottle” as they say.

Fannie and Freddie finances have had overly dramatic optics for decades. The equity should never have been sold into private markets. It was probably destined to have a 2008 moment. Once you make it private, you create this layer of “capital” that triggers insolvency fears when paper losses are taken. That happened in 2008.

So we had to go through a big drama about the “insolvent” GSEs (government sponsored enterprises) when, as I have noted, they never needed a dime of taxpayer cash.

In effect, there was an accounting entry for $200 billion in treasuries on the GSE asset ledger and $200 billion in preferred shares owned by the federal government on the equity ledger and magically they were recapitalized.

Let me be clear. I don’t have insider information about the motives of the policymakers. I just have the public SEC filings. I’m not saying anyone committed accounting fraud or that they even thought about it this way. It is plausible that federal officials decided to inject $200 billion into the GSEs in the form of preferred shares and then patted themselves on the back for taking decisive action in spite of what they perceived as a cost to taxpayers. And then there were accountants at the GSEs who, tasked with dispersing $200 billion they didn’t need, were like “Screw it. I guess we’ll buy treasuries with it. What else can we do?”

I think the best way to create a long term sustainable enterprise without the drama would be to lean into the lie. Just keep all the cash flows on GSE books. Buy treasuries with it. Call it a “capital surplus”. The federal government will pay interest on those treasuries which will be profit for the shareholders, which is largely the federal government. Then there won’t be any drama about insolvency and capital the next time the GSEs face cyclical losses.

There is no reason to have private shareholders in that context. Again, it’s mostly optics because it allows GSE debt and securitized mortgages to be accounted for as private liabilities instead of public debt. None of this matters in regard to actual public finance risks.

One risk of having large public enterprises like this is that eventually, they could become mismanaged or inefficient. In fact, they are being horribly mismanaged now in terms of underwriting standards. But the federal government is even more intrusive in the private lending market than they are with Fannie and Freddie. It doesn’t seem like having private underwriters rather than public underwriters is the key margin there. And the federal government is free at any time to loosen the restrictions on private lenders.

Of course they did in the 2000s, and it didn’t turn out great. But, of course, it was the GSEs and FHA that came through that episode the best. Terrible, but still the best.

So, Pulte seems to be saying the government will continue to be the guarantor. If Trump wants to sell off some portion of the preferred shares, it would be a relatively meaningless change to the status quo, which is probably the best we can hope for.

And maybe, some more private ownership will create pressure to loosen underwriting to increase shareholder profits and we can someday party like it’s 1999 again.