Written by Austin Weinstein for Bloomberg on June 14, 2019.

The Trump Administration’s urgency to release GSEs Fannie Mae and Freddie Mac from federal conservatorship has industry participants concerned that the mortgage giants might be privatized without an explicit government backstop of their $4.7 trillion in mortgage securities.

There is a consensus among credit rating companies, financial firms, and real estate agents that the privatization of Fannie and Freddie could be disastrous without the proper guarantees. If the administration releases the mortgage giants without explicit backing of their existing securities, the industry’s asset managers, concerned they could lose interest and principal, will likely curtail their bond curtail their bond buying. The mortgage market would condense, and consumer access to affordable home loans would plummet.

The administration cannot issue an explicit guarantee of Fannie and Freddie securities. Congressional action is necessary, and both the Senate Banking Committee and House Financial Services Committee have failed for years to pass meaningful housing finance reform. Newly appointed Federal Housing Finance Agency (FHFA) Director Mark Calabria has suggested the administration might release the mortgage giants without federal backing. Congress, he says, will have “sufficient time” to act. After weeks of hearings and debate, the issue remains unaddressed.

At a recent conference, Calabria asked that lawmakers only institute a “limited” guarantee. Treasury Secretary Steven Mnuchin has expressed some resistance to Calabria’s prodding. Mnuchin hopes that a congressional overhaul of U.S. housing finance policy would accompany any efforts to end conservatorship, and he’d prefer an explicit backstop for existing Fannie and Freddie securities. The Department’s plan for the mortgage giants is expected to be released in coming weeks.

Brian Quigley, a fixed-income portfolio manager at Vanguard Group, told Bloomberg that without an explicit guarantee, “there’s a whole host of buyers that currently buy these mortgage-backed securities that may not be able to, or may not want to.” Concerns around the administration’s housing policy are yet to influence bond prices. Mortgage rates remain low, and prospective homebuyers have good loan access.

Under conservatorship, the companies are backed by $258 billion in Treasury funds. If the funds remain available in the event of privatization, the need for an explicit federal guarantee diminishes. The market would remain confident in Fannie and Freddie securities, and the companies could draw on federal funds in case of emergency. If he ceases conservatorship, Calabria will ensure that Fannie and Freddie generate sufficient capital to withstand economic downturn. He’s considering IPOs, but additional steps would likely be necessary.

Chris Whalen, a former debt rater at Kroll Bond Rating Agency, commented on the administration’s actions. “Part of me thinks that they’re just bluffing, and they want Congress to act. When you start messing with the basic infrastructure in the mortgage finance world, you’re looking at some serious risk. When volumes fall in the mortgage industry, the realtors, home-builders, and bankers are going to come to Washington and crucify these lawmakers.”

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