Analysis suggests potential impact of privatization on mortgage rates and risk premiums
Nearly half of agency mortgage-backed securities (MBS) investors expect Fannie Mae and Freddie Mac to be privatized by 2028, according to a survey conducted by JPMorgan Chase & Co. The results, published Friday, provide a glimpse into investor expectations regarding the future of the government-sponsored enterprises (GSEs).
The survey, conducted from Jan. 16 to Jan. 23 with 126 respondents, revealed that 48% of participants foresee privatization occurring within the next four years. Meanwhile, 26% of respondents believe privatization will happen during the next presidential administration, between 2029 and 2032. A slightly higher share, 26%, expressed doubt that the GSEs would ever be privatized.
Fannie Mae and Freddie Mac have remained under government conservatorship since their 2008 bailouts during the financial crisis. Their potential privatization has been a topic of prolonged debate, with significant implications for the US housing market. Efforts to release the two entities from government control have proven to be complex, with no clear consensus on how to proceed.
The survey findings come amid heightened interest in the future of the GSEs. High-profile figures, such as hedge fund manager Bill Ackman, have recently proposed plans to bring Fannie Mae and Freddie Mac to the public markets, suggesting potential initial public offerings by 2026 and 2027, respectively.
In addition to gauging timelines for privatization, the survey explored the potential impact of privatization on risk premiums for MBS guaranteed by the GSEs. Respondents indicated that privatization under the GSEs’ current capital levels could lead to a widening of risk premiums by as much as 45 basis points or more. Increased capital requirements could mitigate the widening to some degree, while the introduction of an explicit government guarantee could potentially tighten risk premiums.
Changes in risk premiums are significant as they affect the costs of mortgage-backed securities, which ultimately influence mortgage rates for homeowners.
Shares of Fannie Mae and Freddie Mac have experienced volatility tied to speculation about their privatization. As of late Friday, Fannie Mae’s common stock had dropped more than 15% compared to the previous day’s close.
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