DoubleLine Asks: Will Trump Reprivatize Fannie and Freddie in His Second Term?

Rhea-AI Summary

DoubleLine has released a research paper analyzing the potential reprivatization of Fannie Mae and Freddie Mac under a possible second Trump administration. Portfolio Manager Kunal Patel, CFA, and Analyst Alex Shvartser examine the GSEs' history under conservatorship and evaluate the challenges of reprivatization.

The authors note that privatizing the GSEs would be a complex, multi-year project requiring coordination across all government branches. While acknowledging significant risks and unclear political or economic benefits compared to the current situation, they suggest the incoming administration might attempt aspects of privatization, potentially causing volatility in the Agency mortgage-backed securities market.

Insights

Financial Policy Analyst

The potential reprivatization of Fannie Mae and Freddie Mac under a second Trump administration represents a significant policy shift that could fundamentally reshape the $7.6 trillion agency mortgage-backed securities market. The complexity of such an undertaking cannot be understated - it would require extensive coordination between Congress, the Executive branch and regulatory bodies, likely taking several years to execute.

The current conservatorship structure, implemented during the 2008 financial crisis, has provided stability to the mortgage market through government backing. Any privatization effort would need to carefully address capital requirements, regulatory oversight and the transition of credit risk from government to private shareholders without disrupting the housing finance system.

Market participants should prepare for potential volatility in agency MBS spreads as policy details emerge. Key considerations include the GSEs' capital structure post-privatization, changes to their credit guarantee business model and the impact on mortgage rates for consumers. The most likely scenario would involve a gradual transition rather than an abrupt shift to minimize market disruption.

Market Research Analyst

While this research paper highlights an important potential policy shift, several market dynamics warrant attention. The agency MBS market's reaction would likely be measured initially, as any privatization effort would face significant legislative and practical hurdles. Historical precedent suggests that major structural changes to the GSEs typically result in temporary spread widening followed by normalization as implementation details become clearer.

The timing of this discussion is particularly relevant given current market conditions. With mortgage rates at elevated levels and housing affordability challenges persisting, any policy changes affecting the GSEs must be carefully calibrated. The research appropriately identifies the lack of clear economic advantages to privatization over the current model, suggesting that market participants may view initial policy proposals with skepticism.

For investors in DoubleLine's mortgage-focused products, this analysis provides valuable forward-looking insights into potential market risks and opportunities, though immediate portfolio adjustments may not be warranted given the preliminary nature of these discussions.

TAMPA, Fla., Jan. 7, 2025 /PRNewswire/ -- While the upcoming launch of Trump 2.0 has generated a lot of public speculation about the incoming administration's policies on immigration, tax cuts and tariffs, another area of policy focus from President Trump's first term could be revived: reprivatizing Fannie Mae and Freddie Mac. In a new research paper, DoubleLine Portfolio Manager Kunal Patel, CFA, and Analyst Alex Shvartser take a look at the history of the government-sponsored enterprises (GSEs) under conservatorship, the challenging pathway to reprivatization and such a move's impact on the Agency mortgage-backed securities market.

The research paper, "Agency Mortgage-Backed Securities: Fannie and Freddie Private Again Under Trump 2.0?," can be accessed here: https://doubleline.com/wp-content/uploads/AgencyMBS-Privatization-of-Fannie_Freddie_Jan2025.pdf.

"Privatizing the GSEs, if pursued, would be a massive and complex project that would take multiple years and likely require coordination among all three branches of government," Messrs. Patel and Shvartser write. "While privatization has significant risks and unclear political or economic upside relative to the status quo, it is certainly possible, and there is a good chance parts of it will be attempted at some point by the incoming administration, which might be a catalyst for sporadic volatility in the Agency mortgage-backed securities market."

Kunal Patel, CFA, is a Portfolio Manager on DoubleLine's Structured Products team. Mr. Patel joined DoubleLine in 2016 as a Mortgage Trader specializing in Agency RMBS and was later promoted to Portfolio Manager in 2021. Prior to DoubleLine, he worked as a Managing Director responsible for CMO and specified pool trading at Cantor Fitzgerald. Prior to that, Mr. Patel worked as a CMO, ARMs and Specified Pool Trader and Deal Structurer at Morgan Stanley, BNP Paribas and RBS Greenwich Capital. He holds a B.A. in Economics from Cornell University. Mr. Patel is a CFA® charterholder.

Alex Shvartser is an Analyst on DoubleLine's Structured Products team. Mr. Shvartser joined DoubleLine in 2020 as an Analyst on the Agency RMBS team. Prior to DoubleLine, he was with TCW as a Senior Vice President, Investment Analytics. Prior to TCW, Mr. Shvartser was a Quantitative Analyst at ICE Canyon. Prior to ICE Canyon, he was Vice President at BlackRock in the Financial Modeling Group. Mr. Shvartser holds a B.S. in Electrical Engineering from the California Institute of Technology and an M.S. in Mathematics in Finance from New York University.

About DoubleLine

DoubleLine Capital is an investment adviser registered under the Investment Advisers Act of 1940. DoubleLine's offices can be reached by telephone at (813) 791-7333 or by email at info@doubleline.com. Media can reach DoubleLine by email at media@doubleline.com. DoubleLine® is a registered trademark of DoubleLine Capital LP.

©2025 DoubleLine Capital LP.

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SOURCE DoubleLine

FAQ

What are the potential impacts of Fannie Mae and Freddie Mac reprivatization on Agency MBS markets?

According to DoubleLine's research, reprivatization attempts could trigger sporadic volatility in the Agency mortgage-backed securities market, though the exact impact remains uncertain.

How long would it take to privatize Fannie Mae and Freddie Mac under Trump's potential second term?

The research indicates it would be a massive and complex project taking multiple years and requiring coordination among all three branches of government.

What are the main challenges identified in DoubleLine's research for Fannie and Freddie reprivatization?

The research highlights significant risks, unclear political and economic upside compared to the status quo, and the need for extensive coordination across government branches as major challenges.

How likely is Trump to attempt Fannie Mae and Freddie Mac privatization in a second term?

According to DoubleLine's analysis, while full privatization faces challenges, there is a good chance parts of it will be attempted by the incoming administration.