"Second Time as Farce" — Trump's Plans for the GSEs and What Should Come Next

Doug Simons is a former investment banker, having worked in Morgan Stanley's mortgage securitization business and then leading the advisory efforts at Credit Suisse and UBS related to bank capital, asset/liability management and housing finance reform. Most recently, he served as a Senior Markets and Policy Fellow at the CFPB, where he advised Director Chopra and his team on issues related to the banking industry and represented the Bureau on FSOC’s Systemic Risk Committee.

Fannie Mae and Freddie Mac remain the unfinished business of the 2008 financial crisis. Direct government control was meant to be temporary, but successive administrations have stumbled through a series of false starts and policy reversals that have done little to change the status quo. Having backed away from plans to end the conservatorships by the end of his first term, Trump’s second administration promised last summer to sell shares in the companies. However, this “IPO” announcement seemed largely performative at the time and increasingly so as time has passed, with the sale of a small amount of stock not intended as a step toward ending the conservatorships. Protracted discussion of a token sale serves only to distract from FHFA Director Pulte’s efforts to usurp the Enterprises’ governance and throttle programs that assist lower-income and minority borrowers. Plans for an offering could be abandoned with little consequence, but if this team with its reputation for self-dealing does move forward,  it will be reasonable to ask whether the real goal is to enrich political allies.

When this administration at last leaves the stage, what comes next cannot be a return to the pre-Trump status quo of endless conservatorship. Why? After all, if the Enterprises were able to operate under conservatorship for the previous seventeen years, why couldn’t they do so again if there is no longer active subversion of their operations? This sort of complacency is a mistake. If Democrats win the presidency, they can’t afford to “kick the can down the road” as they have previously. The failure of the Obama and Biden administrations to resolve the conservatorships on terms consistent with their values was a strategic mistake that gave two separate Trump administrations a chance to cripple the Enterprises and abandon their mission. There should be no third bite at the apple.  

While the ambiguity of indefinite conservatorship lets policymakers avoid hard decisions, it isn’t risk- or cost-free. Long-term conservatorship has undermined employee morale and drove significant attrition within the executive ranks. Given how important the Enterprises are for the economy, this is very dangerous. They can be described as “melting glaciers,” where the decay is occurring too slowly for most of us to notice. Nevertheless, they are decaying and an operational mishap or other management failure could arrive without warning.  Director Pulte’s legally dubious actions have accelerated the deterioration. Of course, Pulte has only been able to act as he has because the Biden team left the Enterprises in conservatorship. Long-term stability requires moving past what is an increasingly fragile status quo.

Trump 2.0: What Exactly is the Plan?

In contrast with Secretary Mnuchin’s more measured approach, the second Trump administration is acting impetuously. The crux of the plan leaked last summer was that Treasury would offer as much as $30Bn of the companies’ shares to investors. CEOs of the leading investment banks met directly with the president to pitch for the assignment, but no lead advisor has been named. The high-level talking points leaked to the press were far-fetched to say the least. Most notably, they claimed the companies would have a combined valuation of $500Bn, over twice any reasonable estimate. This is an especially bizarre claim as the only way to achieve that kind of valuation would be to substantially raise mortgage rates, something they promised to avoid. Similarly, suggesting a $30 billion offering could be completed within a few months is wildly optimistic even if valuations were more realistic. Whatever the investment banks may say to win an assignment, these plans would not survive contact with real investor feedback. However, on two points the administration is entirely correct. First, the Enterprises are currently in a strong financial position and their status should be resolved before there is another downturn in the mortgage market. Second, the companies cannot attract capital or successfully conduct business unless their debt has some kind of explicit guarantee from the U.S. government.  

Stepping back, the administration has yet to articulate what a sale of only a modest fraction of the government’s position is even meant to accomplish. What is the desired end-state? If the Enterprises remain in conservatorship, will the new shareholders have any meaningful governance rights? Will Treasury convert its nearly $200Bn in senior preferred shares to common before an offering? If so, at what price? If not, shouldn’t prospective investors assume their stakes will be fully diluted? Will there be any changes to the Enterprises’ pricing models and capital requirements? Absent clarity on these points, it’s highly unlikely shares can be sold to reputable investors with fiduciary obligations. However, the current Trump team appears to lack the intellectual rigor or seriousness of purpose to craft a coherent plan. The first Trump administration pursued a more deliberate process but decided against proceeding with an offering. Given the more amateurish and chaotic nature of this team, it wouldn’t be surprising if the current process ends up being discarded.

Of course, Trump and his team are likely uninterested in substantive reform and will instead focus on helping friends, hurting enemies, and generating splashy headlines. Director Pulte has repeatedly stated that the Enterprises will remain in conservatorship even after an offering is complete. Commerce Secretary Lutnick has also hinted that the primary goal of an offering is not to privatize the Enterprises, but rather to establish a “mark-to-market” for assets the government will hold indefinitely. This would be consistent with the administration’s desire to take ownership stakes in private companies (e.g., Intel) and establish a U.S. sovereign wealth fund. If this is the case, they could pivot to much smaller offerings, where existing investors (e.g., Bill Ackman) purchase additional shares at an inflated price in return for policy changes that help monetize their stakes (e.g., through immediate restoration of the common dividend). It’s also possible they could find partners (e.g., sovereign wealth funds in the Gulf States) willing to commit capital with few questions asked in return for unrelated favors.

While occasionally teasing an offering, Director Pulte has been busy remaking the Enterprises into something more to the administration’s liking. In his first week in office, he removed the majority of board members at both companies and, in seeming violation of statute, appointed himself as Chairman of the Board of both companies. He subsequently fired both CEOs along with a number of their senior staff. Most recently, he committed to execute on Trump’s directive for the Enterprises to engage in a version of quantitative easing by purchasing $200Bn of mortgage-backed securities. None of these steps are likely to instill confidence among investors and suggest an offering may not be the ultimate goal. Indeed, the real agenda may be more policy-related. Pulte has terminated programs focused on promoting lending to minority and other underserved borrowers, monitoring climate risk and combating unfair and abusive practices. Finally, he has leveraged his dual role to engage in intramural disputes, repeatedly calling for the resignation of peers elsewhere in government and using data purportedly obtained from the Enterprises to refer some of them for malicious prosecution.

Picking Up the Pieces

Should Democrats win the presidency in 2028, they will need to decide what to do with the shambles they will inherit in housing finance (Republicans will face the same choice if by some chance a more moderate faction gains power). It seems unlikely anything of real substance will happen over the remainder of the Trump administration. Perhaps Treasury will exercise its warrants for 79.9% of the common stock, offer some of these shares to investors, restore the common and junior preferred dividends, convert their senior preferred to common, and/or shift ownership of the Enterprises to a new sovereign wealth fund. However, none of this financial engineering will have any real impact on the government’s ownership position. Moreover, it is highly unlikely any of these steps will have been codified by statute, so a new administration will be free to reverse most of what was done. An important near-term task will be to stabilize morale among the staff and halt the employee attrition that threatens the Enterprises’ long-term viability. Work can also begin on repairing damage to their mission activities. The good news is that the Enterprises are massive organizations filled with dedicated employees. What is required is to communicate a clear plan for what will come next. 

Progressive advocates might prefer to shift toward a nationalized system where the Enterprises operate as a single government agency (perhaps outsourcing select commercial activities) or as “utilities” that transfer much of their risk exposure to investors through the credit risk transfer (“CRT”) market. However, neither the CRT market nor a utility model are likely to deliver the promised benefits in terms of reducing taxpayer risk or lowering mortgage rates. As a practical matter, there is also little chance of gaining Congressional support for permanent government control or any other significant changes. Indeed, given how much support for progressive housing priorities is embedded in current law, seeking additional legislation is a poor use of a new administration’s finite time and political capital. If fundamental changes to the GSE model are deemed either unworkable or undesirable, the Enterprises should be released without further delay (while keeping Treasury’s net worth commitment in place). Similarly, if the objective is to remove taxpayers from their current first-loss position, policymakers must accept the logical consequences. One is that guaranty fees must reflect the cost of private capital (fortunately, the Enterprises are already setting pricing to deliver a market return on reasonable capital requirements). The other is that shareholders will demand control over hiring, underwriting and pricing as a condition of investing

One silver lining from the drawn out conservatorships is that by 2029 the Enterprises can likely be released without raising additional capital. However, restoring their substantive independence will entail the less complex but still difficult task of selling off Treasury’s large ownership stakes. A realistic valuation for the companies by that point (i.e., 1x Tangible Book Value per Share, well below the inflated estimates offered by Ackman or investor Michael Burry) will exceed $250Bn. Given the existing warrants and its large senior preferred claim, Treasury will hold the bulk of this value and selling it will take several years. The sales would have no bearing on the companies’ capitalization or operations, so the only risk is the price at which Treasury can sell. Additional background on how the release from conservatorship and sell down of Treasury’s stakes would work, why likely valuations are so much lower than suggested by Ackman and Burry, as well as more detailed explanations for why a utility or co-op model aren’t viable, can be found on my Substack.

The opinions shared in this article are the author’s own and do not reflect the views of any organization they are affiliated with.

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