Tag Archives: Pulte

What Happens if Fannie and Freddie Go Private?

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I was quoted in Fintech Nexus’ Home Invasion: What Happens if Fannie and Freddie Go Private. It reads, in part,

The Trump Administration has telegraphed significant changes to GSE mortgage lenders — with massive implications for the industry

Since his swearing in on March 14 as the fifth Director of the Federal Housing Finance Agency (FHFA), construction mogul William J. Pulte has executed major policy and personnel changes. Among other moves, Pulte has named himself board chair of the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac, removed 14 of the GSEs’ 25 sitting board members, fired most of the companies’ audit boards, generally slashed headcount, and rescinded several Biden-era oversight-related advisory bulletins.

According to Professor David Reiss of Cornell Law School, a scholar of real estate finance and housing policy, Pulte’s simultaneous leadership of the FHFA in addition to roles at the GSEs, which have been under federal conservatorship since the 2008 financial crisis, is not normal.

“The whole point of regulation is you have somebody who’s overseeing an industry,” he told Fintech Nexus. “This is like the left hand [knowing] what the right hand is doing: You’re overseeing yourself, so it’s … kind of inconsistent with the notion of a supervisory regulator.”

Fintech Nexus contacted the FHFA, requesting that it comment on the impetus behind Pulte’s simultaneous self-appointments to Fannie and Freddie. The FHFA did not respond.

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CAPITAL IDEAS

One idea percolating is for the Trump Administration to use Fannie and Freddie as a pool of capital to inject into a sovereign wealth fund. An op-ed in the Financial Times by Stifel CEO Ronald Kruszewski suggested this reconfiguration could provide “continued government backing,” “stabilize investor confidence,” and “pave the way for a $1 trillion sovereign wealth fund by 2040.”

However, in a letter to the editor in the Financial Times, Dini Ajmani, Former Deputy Assistant Secretary of the US Treasury, suggested the idea would fail, as any privatization of the GSEs would require proper capitalization, taxpayer compensation, and adequate confidence of securities investors.

“I believe the difficulty in meeting all three conditions is why [the] status quo has persisted,” Ajmani told Fintech Nexus. “To build capital, Fannie/Freddie must retain earnings, which means the taxpayer is not compensated. If the taxpayer is compensated through dividend payments, private capital will be uninterested because the agencies will be undercapitalized.”

To this end, FHFA Director Pulte may continue to atrophy many forms of GSE oversight as a way to prime the pump: Pre-empting congressional activity by deregulating Fannie and Freddie can accelerate their transition toward open-market frameworks.

The Trump Administration may see it as its only viable short-term  avenue, as many members of Congress are uninterested in bringing Fannie and Freddie out of conservatorship; Senator Elizabeth Warren (D-MA), member of the Senate Committee on Banking, Housing, and Urban Affairs, called the move “Great for billionaires, terrible for hardworking people.”

Should the Trump Administration succeed in its quest, we may see states attempting to fill in the gaps on regulatory accountability, rhyming with blue-state attorneys-general’s litigiousness in the wake of the Consumer Financial Protection Bureau’s de-clawing, though this is unlikely.

“State regulators do not generally play a role similar to the two companies (except to some small extent state Housing Finance Agencies),” Reiss of Cornell Law School said. “I could imagine state agencies trying to increase consumer protection for mortgage borrowers, if the federal regulatory environment changes, but we would have to see how that plays out to understand how the states would respond.”

Move Fast and Break the Mortgage Market

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Bill Pulte, FHFA Director and Chair of Fannie Mae & Freddie Mac

I was quoted in the American Prospect’s story, Move Fast and Break the Mortgage Market. It reads, in part,

This week, the Donald Trump–appointed chief regulator for the two quasi-governmental companies that own or control about half of the residential housing market anointed himself the board chair of both those companies. This maneuver could signal a host of shenanigans: the culmination of a 17-year hedge fund get-rich-quick scheme, a balance-sheet fiction to justify tax cuts, a new favor factory for apartment developers with ties to the president, a data transfer so Elon Musk’s everything app can learn how to sell mortgages, or something equally problematic.

But what gives former board members, market observers, and officials at the regulator greater concern is the distinct possibility that mucking around with the $7.7 trillion secondary mortgage market could lead to breaking it.

If that happens, homebuyers may not be able to get mortgages, homebuilders may be reluctant to break ground, and uncertainty would abound in a market that has brought down the economy on more than one occasion in U.S. history, most recently in 2008. “It could freeze sales, freeze refinances, stop people from forming households, cause people to be afraid of moving, freeze up developers of housing and the secondary market,” said David Reiss, a professor at Cornell Law School.

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Multifamily Glad-Handing

The GSEs have a pretty sober business on the single-family side, and since the housing collapse really originated there, a lot of work was done to clean up that part of the business. But Fannie and Freddie also make loans in the multifamily market to support building of apartments and condos. A former official with one of the GSEs told me that business is a little looser, with ways to enhance those loans.

This president, of course, is a multifamily real estate developer himself, who has friends in multifamily real estate development. Hamara, one of the new board members, is a vice president at Tri Pointe Homes, a major homebuilder. You could imagine these relationships leading to the GSEs pushing risk limits, loosening credit standards, or raising loan-to-value ratios for favored borrowers. There is a secret mortgage blacklist at Fannie Mae for condos without enough property insurance or in need of repairs; controlling the board could make that blacklist go away, at least for certain developers.

This kind of setup resembles the opportunity zones that were a feature of the 2017 Trump tax cuts. They gave significant tax breaks to investors in certain communities deemed in need of development. Trump administration officials credit opportunity zones with increasing housing construction, but critics argue that the investments were rife with corruption and favor-trading.

That could also be the case here: New criteria guiding the new boards might lead to more multifamily housing, but with uneven results, favors to friends, and idiosyncratic deals that would be more about boosting allies than building housing. And as Calabria has pointed out, Fannie and Freddie are likely under Trump to cancel affordable-housing initiatives, meaning that sweetheart deals might only extend to the developers, rather than the public. Plus, there is the potential for dramatic losses if lending standards erode.

Reiss, of Cornell, agreed that this was all a possibility. “If someone gets to one of the directors, and they are there not acting as a fiduciary for the company, it opens the door to political favoritism,” he said.

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What If It Breaks

Pulte is expected to force job cuts at the GSEs, which employ roughly 15,000 people. He has already been making familiar noises about DEI and remote work. One possibility on the table at the GSEs is merging Fannie and Freddie; you don’t usually have the same person chair the boards of two direct competitors. The regulatory agency is also likely to see cuts; already at FHFA, according to one source, fair lending and consumer protection groups have been put on administrative leave, along with employees at the Division of Research and Statistics.

Controlling the boards would limit dissent about these actions. But cuts in the name of efficiency could strain or even rupture the numerous functions the GSEs carry out, with consequences for the entire housing market.

Due to the conservatorship, the GSEs are limited in what they can pay their employees, which has led to a talent drain. Some systems have not been integrated, and others are not up to industry standards. Fannie and Freddie have a cautious internal culture that doesn’t move quickly. Hacking away at their already weakened structure could easily create operational harm.

But Reiss explained that nothing has to overtly break to lose the confidence of the markets; even a lack of workforce to move the paper around could create that impression, and disrupt the flow of credit. “If there is any kind of uncertainty, the spread between Fannie and Freddie securities and Treasury bonds will increase,” he said. “Investors will ask if the government will make good on Fannie and Freddie bonds. This uncertainty and direction could increase costs over time for all borrowers.”