President Trump stressed this week that his administration is working to make the companies public, while maintaining implicit support from the U.S. government, his administration is working to whip the stock of the giants Lemmy and Freddy Mike.
But Trump offers new details on how he designed such a complex cause without pushing the country’s $9 trillion mortgage market and issuing a spiral of home loan rates.
“Our great mortgage lenders Fannie Mae and Freddie Mac provide our country with vital services by helping hard-working Americans realize the American dream. I’m working to bring these great companies out there, but I want to be clear that the U.S. government will maintain its inherent assurance, I will maintain its strong attitude, and I will maintain a strong position in my president.”
Stocks of the two government-funded businesses initially soared Wednesday, then said in an interview with Bill Pulte, the chairman of the two companies, that Trump did not say he wanted to privatize the companies, which they could openly privatize while government controls.
Fannie Mae closed up 2.2% on Wednesday, while Freddie Mac's stock (FMCC) took 5.3%. But as of noon Thursday, both were declining.
The mortgage bond market has issued similar chaos so far. After Trump's latest post, additional earnings investors demanded compensation for the risk of retaining mortgaged bonds, then narrowed slightly, then increased a little more, and tightened again.
"The devil is really in this detail," said Walter Schmidt, senior vice president and manager of mortgage strategy at FHN Financial. "The policy wish list is very different from reality."
Trump’s latest statement looks like an effort to ensure Fannie Mae and Freddy are released from the government’s control, even if they are released from the government’s control, which is a key factor that helps maintain mortgage bond yields.
Under the current system, Fannie and Freddy are under formal government control, giving them the same nearly perfect credit rating as the U.S. government. Debt investors believe that the mortgages they buy, package and sell are ultra-low-risk bonds.
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The implicit guarantee proposal by Trump would be to restore Minnie and Freddy before the 2008 financial crisis, when the mortgage giants did not receive formal support from the government but were often considered too big to fail, leading to expectations that the government would step in. This setup also gives investors confidence that buying Fannie Mae and Freddie Mae mortgage bonds is low-risk, though not as low-risk as a setup with clear government support.
“Trump (Trump) GSE will still have implicit assurances in the next few days,” said Tracy Chen, who led global structured credit investments at Brandiwan Global. "This removes tail risk. At the same time, I think the market is still looking for the best situation, which is a clear guarantee, but we won't have it."
However, in the case where the GSE is released without any government guarantees, mortgage bond investors will demand additional yields to keep the debt, which suddenly has a more risky situation. Some people may choose to buy bonds entirely. Mortgage rates may increase.
Morgan Stanley strategists Jay Bacow and James Egan wrote in a note Tuesday that it was difficult to call Fannie and Freddie’s release, which is “a fairly digital nature of how things work.” However, the current uncertainty surrounding guarantees could even be used by some current buyers of mortgage bonds.
"While we believe that the existence of GSE is extremely unlikely without some kind of government assurance, the longer the uncertainty will be, the more obstacles it will be for investors who buy local supply," the strategist wrote.
If demand for Fannie Mae and Freddy mortgage bonds essentially dry up, it will fundamentally disrupt the current housing financing system. The two companies support about 70% of the mortgage market, and if investors lose confidence in these entities, more homebuyers may need to turn to alternative mortgages, such as higher-interest non-commercial loans, or government loans put taxpayers at risk.
"We are currently in the U.S. (collateral-backed securities) market, so any overhaul is full of risks," Schmidt said.
Claire Boston is a senior journalist at Yahoo Finance, covering housing, mortgages and family insurance.
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