Above, Don Layton
Sharing his insights on the Trump administration’s approach to GSE (government-sponsored enterprise) privatization, former CEO of Freddie Mac and self-proclaimed “GSE-ologist,” Don Layton, said it’s highly unlikely for Fannie Mae and Freddie Mac to become privatized anytime soon.
“It is highly unlikely conservatorship exit would happen in the next year or two. You could have a step or two taken, like they did in the first Trump administration—that would be helpful,” Layton said. “If you look carefully at what the actual Trump administration people have said, they have made no commitment to undertaking it now. They have made no commitment that it would be quick if they did. In fact, they’ve said the opposite, ‘We’ll be very careful and it will take time.’”
Despite the buzz surrounding privatization, Layton predicts Trump’s second go-around will be much like the first—“They’ll get to something later, but not right now.” Even during Treasury Secretary Scott Bessent’s confirmation hearing, he wasn’t asked a single question about GSEs, Layton pointed out.
Noting that “no one wants to screw up the mortgage system” and have rates shoot up to 9%, Layton emphasized the administration’s cautious approach.
Even with a “fully responsible exit” requiring about $200 billion in capital, it’s not clear how it will look for these companies post-conservatorship, added Layton.
“It’s not going to be an easy stock sale,” he adds. “The notion that you can just snap your fingers and raise all this money—that means it takes time. So, I’m more, my center point is that Trump Two can take some good steps to move the ball down the court a bunch, and that’s as far as they’ll get during the four years.”
When privatization does happen, though, it will involve some version of a modified Preferred Stock Purchase Agreement (PSPA), Layton predicted. Whether mortgage rates will go up or down largely depends on where inflation and the Fed policy is at, he added.
“How much can the GSEs impact it? The answer is, if they mess it up, maybe rates can go up 5, 10, 15 basis points—20, but that’s a lot,” Layton said. “I do want to note that—this is a little one of these complexities—the government has kind of discovered the GSEs as being a little bit of a captive cash cow to them now.”
Although GSE reform and privatization are big issues in housing, for the average American going to the voting booth, said Layton, these issues don’t exist.
“It’s not a highly emotional issue in any way for the average voter. So when Trump came in—I don’t think Donald Trump mentioned the GSEs on the stump once, but his Secretary of the Treasury, Steven Mnuchin, actually had an extensive mortgage securities background and stated right up front that it would be one of his top 10 priorities to try to get GSE reform,” Layton added. “The (first) Trump administration only got to GSEs halfway through.”
In September 2019, Trump approved the Treasury’s reform plan for Fannie Mae and Freddie Mac, changing its recapitalization policy so that the profits were retained by the companies instead of being given to the government. Because of that, added Layton, the cumulative net worth of the companies is approaching $160 billion—ultimately “a good decision.”
