A private Fannie Mae and Freddie Mac would impact investors' real estate portfolios — but to what degree depends on what the Trump administration means by "private," industry insiders say.
The idea of privatizing the Federal National Mortgage Association and Federal Home Loan Mortgage Corp. bubbled to the surface in June as part of a reorganization plan for the federal government proposed by the Office of Management and Budget. Few details were provided as to how Fannie Mae and Freddie Mac would go private, but the plan suggests lifting the U.S. conservatorship of the two entities, in place since 2008, but keeping a limited federal backstop or guarantee.
Under the plan, mortgage-backed securities issued by Fannie Mae, Freddie Mac and their competitors would have a federal guarantee only "in limited, exigent circumstances," the OMB plan states. Only Congress can privatize Fannie Mae and Freddie Mac, and no bills have been introduced that would do so.
Investors have much at stake. The largest 1,000 U.S. retirement plans had a combined $315.8 billion in real estate assets as of Sept. 30, Pensions & Investments' latest annual survey found. As of March 31, real estate managers had a record $266 billion in dry powder, according to data from London-based alternative investment research firm Preqin.
Some in the industry are concerned that privatization could lead to less available credit resulting in lower valuations in some real estate sectors. A private Fannie Mae and Freddie Mac also would limit the government's role in ensuring the liquidity of the housing markets, as well as in encouraging, through incentives, increases in housing for underserved market sectors and promoting resource-efficient housing.
A fully privatized Fannie Mae and Freddie Mac would diversify credit and create a new private market to replace the government agencies, said Michael Smith, Chicago-based partner at law firm Baker & McKenzie LLP. "There will be more companies that will be able to apply for government backing," Mr. Smith said.
Added Chuck Leitner, CEO of Berkshire Group: "In many ways these agencies have been moving pretty aggressively to independent life even before the current administration." The Boston-based firm borrows mainly from Freddie Mac for multifamily projects and also is an investor in Freddie Mac securities, he said.
Both Fannie Mae and Freddie Mac have been positioning themselves away from government conservatorship, creating markets in which they could still make money even without government ownership, Mr. Leitner said.
However, "the devil is in the details," he said. How the switch to a private ownership structure unfolds depends on whether it is a smooth transition without a big increase in the agencies' current cost of capital, changes to their current processes and procedures, or a loss of staff, he said.
"As an active borrower of agency debt and investor in the bond pools we think that the end to Fannie Mae and Freddie Mac's conservatorship and transition to an independent ownership structure is ultimately inevitable," Mr. Leitner said.