This month I was asked to share my thoughts on the privatization of Fannie Mae and Freddie Mac. As with most economic-related questions, my answer is, “It depends.”
Before the financial crisis, Fannie and Freddie were always privately held. The fact that they were not under government oversight was a significant part of the reason for the financial crisis. I don’t agree with that narrative, but they did have to take them under management to keep them solvent, so definitely the right decision at the time.
I’ll answer directly that I think this is a good decision, but not for most of the reasons mentioned in the article. One of the biggest factors in the bond market is the federal deficit. Since the government actually owns them both now, they will have a large cash windfall that the government definitely needs and would help with. I think the most important thing is balancing the federal deficit. If we do that, then rates will have large downward pressure.
So what would the upside be? Moving back to being privately held I think will actually allow them to be more nimble and start to create some products to help with affordability, specifically for the first-time homebuyer. Now some would say that “creativity” is what got us into the 2007/2008 mess, but to lay that all at the feet of Fannie and Freddie is not realistic. That isn’t how it really happened.
What about increased rates because of increased risk? While I understand that logic exercise, I am not sure that is how it would play out. I think most large investors would assume that:
1) most financial crises don’t look the same (not sure what will tank the economy but it is rarely the same thing that happened last time, so they will not worry about this as much as we think they will)
2) they would also assume (probably correctly) that if the world did crumble the same, the government would do the same thing.
While it is a mixed bag and there are pros and cons, I think the net effect for rates would be flat or create a condition for slightly better rates… but mostly because of the benefit of the cash windfall to the government. Most of what I have read predicts that the government would get $300 billion in revenue from the sale and free up $8 trillion in liabilities off the government balance sheet. That will put more downward pressure on rates than the potential rate-increasing factors like some limited increased risk.