When President Trump announced on social media that he was considering releasing Fannie Mae and Freddie Mac from government conservatorship last week, the financial markets responded swiftly. Fannie Mae’s stock surged by more than 44%, while Freddie Mac climbed nearly 37%.
However, the implications for real estate are far less optimistic. According to Bloomberg, removing Fannie and Freddie from conservatorship could add over $40,000 in costs to a typical consumer residential mortgage over the life of the loan. While the effects on the multifamily sector are less certain, they are also considered risky.
The conservatorships began in the aftermath of the 2008 Global Financial Crisis, when the federal government intervened to stabilize the GSEs. These measures were originally intended to be temporary, but Fannie and Freddie ultimately came to support about 70% of the mortgage market, according to the National Association of Realtors. The NAR has noted that without the Gases and FHA-insured loans, “almost no capital [would be] available for mortgage lending.”
This government support has significantly shaped the mortgage lending landscape, often making it difficult for competitors to gain a foothold. Mark Calabria, senior advisor to the Cato Institute and former director of the Federal Housing Finance Agency during Trump’s first administration, told GlobeSt.com in an earlier interview, “What I experienced as director was a regular stream of people like insurance companies saying, ‘I lost that deal to Freddie by 10 basis points.’”
Experts estimate that fully removing the GSEs from conservatorship could take between two and four years. “I think it’s largely an uphill battle politically and while it does have merit to have IPOs and raise potentially $300 million for the government, the ripple effects could be more consequential than the benefit,” Clark Finney, first vice president and director of capital markets at Matthews Real Estate Investment Services, told GlobeSt.com. He added, “But I do think if an executive order happens this year, it will take an act of Congress for it to be permanent and the odds of that are low.”
If privatization does occur, LeaseLock Chief Economist Greg Willett explained to GlobeSt.com that it’s “likely that privatizing Fannie and Freddie will remove or at least significantly reduce the government backing that's currently in place for securitized home mortgages.” This increased risk could push mortgage rates higher, creating a headwind for potential homebuyers and, conversely, a tailwind for rental housing demand.
What is interesting is that the GSEs have been “super profitable,” Jeff Klotz, CEO of The Klotz Group of Companies, told GlobeSt.com. “And, of course, they made the multifamily sector that we focus on that much more attractive to institutional and noninstitutional investors. The thought of something changing is scary to us in the business because you don’t know what you’re going to get. We rely on them heavily, so we would hate to experience challenges.”
Klotz also questioned whether the GSEs would maintain their focus on workforce lending, noting, “They have the best rates and better terms than the other lenders do.”
Willett added that ending conservatorship “wouldn't necessarily shift their multifamily focus from middle-market and lower-end product,” but there is a real possibility that a push for profitability could take precedence over their role in market stabilization.
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