The US president has long advocated privatising Fannie and Freddie and, more than decade on, the question of what to do with them is regarded as the great unresolved issue of the crisis. After two years in office, Trump is believed to have a plan to privatise the firms in the works.
Fannie and Freddie were created during the Great Depression by President Franklin D. Roosevelt in a bid to promote home ownership for America’s middle class. The two brands bought mortgages from banks, packaging them into securities and off-loading the risk to investors.
They were synonymous with 30-year fixed rate mortgages and underpinned the American mortgage market. Unfortunately, it turned out that Fannie and Freddie were giving mortgages to too many people who couldn’t pay back what they borrowed.
The upshot was that, in 2008, just before the wider banking collapse, Fannie and Freddie were heading for insolvency. The US government spent almost $200bn of taxpayer money to prevent their collapse and placed them in ‘conservatorship’ – which means the government controlled the bank’s financial affairs – where they have remained ever since.
Now Fannie and Freddie are making money again and have more than paid back what they received in bailouts.
Mark Calabria, Trump’s nominee to lead America’s Federal Housing Finance Agency, wants to fully privatise the firms in a bid to open up the mortgage market and create more competition. During his confirmation hearings, the libertarian economist told senators that they should play a leading role in pursuing changes for Fannie Mae and Freddie Mac.
Calabria promised to preserve the 30-year mortgage, despite previously questioning its validity, but he has been explicit about his desire to reduce Fannie and Freddie’s dominance of the market by fostering competition.
His plans could meet with opposition in the Democrat-controlled House of Congress, but the Financial Times has reported that Trump might try to bypass representatives if he can’t get them on-board.
Speculation that Fannie Mae and Freddie Mac are about to be privatized has coincided with a dramatic increase in trading of shares in the companies last month.