Fannie & Freddie Want To Show Us Their Private Side

June 2, 2025
  • Fannie Mae’s Institutional Arrogance Earned Them A Leadership Purge
  • The GSEs Are Up For Sale To Fund The Big Beautiful Bill
  • The Time Of The Tariff Chaos Is Not The Time To Privatize The GSEs

Fannie Mae, the dominant of the two government-sponsored entities (GSEs), has long permitted a reckless culture that was maintained after going into receivership. They’ve seen some significant lapses of judgment leading up to a slew of announcements in 2006, 2008, 2011, and 2013. Freddie Mac was created in 1970 to address the expanding mortgage market and compete with Fannie Mae but instead tends to act like its nicer brother (Freddie). The GSEs buy mortgages from banks to free up capital and guarantee them so that investors can enjoy liquidity. Bill Pulte, the new politically appointed head of GSE regulator (FHFA), who is an heir to the giant home builder Pulte Group, has shaken things up by purging GSE leadership and revitalizing plans to privatize them to reduce the size of the federal government. Here is a subtle reminder that FHFA was essentially rebranded as OFHEO in 2008 after another round of Fannie bad behavior. Why should readers of Housing Notes care about any of this? While an IPO for the GSEs could bring a lot of money to the federal government, privatization increases the risk of higher mortgage rates.

Source: JP Morgan

What Is An Implicit Guarantee?

One of the advantages that the GSEs have over the private sector is an implicit guarantee, which means their actions have full faith and credit from the federal government in case something goes wrong, hence lower risk. Mortgage investors are more likely to have their investment protected than anyone else because of that guarantee, which means the GSEs can offer a slightly lower rate than other sources. About 70% of US mortgages go through the GSEs in some form, and there are 51 million US mortgages in place. High-end markets like Manhattan have less exposure to the GSEs because their maximum mortgage threshold is about $1,000,000.

This proposed GSE IPO is an essential source of funding for the “Big, Beautiful Tax Bill” that will rely on cuts to the federal government and asset sales to bring down the deficit even though it is likely to increase it by $4 trillion after tax cuts to the wealthy are executed (which is the reason for the bill’s existence).

Fannie Mae Still Shows Risky Behavior

A good Wall Street article, The Mortgage-Market Questions Key to a Public Offering for Fannie and Freddie [gift link], suggests “the companies became less risky and even more central to the housing market, many came to believe the current system works well. “

From my narrow appraiser slice of the housing market, Fannie Mae’s behavior has always been reckless, and there has been a long series of mistakes, as shown above (with a lot of links). Currently, a vast swath of mortgage lending, including first mortgages, does not require an appraisal (a human being inspecting the interior of the property to see, for example, if 500 feral cats live there). Fannie’s chief appraiser is pushing for appraisers to be pulled out of the analysis portion of the valuation to become data collectors, leaving the valuation to automated valuation models (AVMs). This non-human approach breeds data cancer, as my friend and appraiser colleague Phil gets credit for coining the phrase. The Zestimate is an AVM on the consumer side of the housing market, and it is wildly inaccurate. Trillions in the value of mortgage-backed securities are based on human beings physically viewing the properties and having the same person provide a value opinion. In a public forum, I remember hearing an analyst from Moody’s (they rate securities) comment on how essential it was to have the appraiser inspect the property on a first mortgage loan. That standard for the multi-trillion dollar bond market is fast eroding (which will raise mortgage rates).

What Would Happen Immediately After Privatizing?

I’ve read that mortgage rates would probably rise 0.4% to as much as 1% right away as the implicit guarantee disappears even though the plan is to try to sustain one. Some maintain that mortgage rates could eventually drift back down to pre-privatization levels after investors begin to get more comfortable with the changes to the system (not figured out yet). One of the shorter-term benefits of privatization could be the drop in fees that the GSEs charge banks, which could lower costs to some borrowers. As Real Estate News smartly suggests, real estate agents should keep current on this topic because it will impact their customers.

But given the economic uncertainty that has been thrust upon us in the past five months in the form of tariff tantrums, where the president has changed his mind roughly 50 times (itemized list), any immediate privatization efforts to the GSEs seem reckless in the context of housing, the world’s largest asset class. 

Final Thoughts

The idea of using the privatization of the GSEs as a mechanism to fund the tax cuts for the wealthy in the manic era of tariff implementation seems reckless. Thankfully, serious delinquincy rates are falling and are essentially close to normal (pre-pandemic) levels. Admittedly, I am not against the eventual privatization of the GSEs. However the scale of the change required to the mortgage finance system during a period of economic chaos is short-sighted. Whatever happens, anyone in the housing market industrial complex should keep current on what’s unfolding on a nearly daily basis to advise their clients better.

The Actual Final Thought – It’s important to aspire to feel the stoke that dogs feel. Don’t let it hinder your amp.

Here’s My Podcast: What It Means

Here’s My Podcast: What It Means

The latest episode is a click away as well as the podcast feeds for all the “What It Means with Jonathan Miller (WIM).”

Apple (within the Douglas Elliman feed)   Soundcloud  Youtube

Monday Mailboxes, Etc. – Sharing reader feedback on Housing Notes.

I pre-empted my mailbox feedback late last week so I’ve only got the following incredibly thoughtful response piece on branding and designations to the mailbox section of last week’s newsletter.

May 28, 2025: Looking Ahead Towards New Listings

  • The membership of the Appraisal Institute is not at fault here. It is the leadership and a small number of toxic FOJs. I think AI’s days are numbered and all the hard work members placed on getting their designations will be lost. I would like to provide a different thought “about all their hard work on getting their designations will be lost”. I would respectfully have a different take with the “lost” part. Nothing is lost, my hard work hopefully made me a better appraiser, that won’t change, at least I hope not. Second the journey we take whether it be for an AI designation, in my case, SRA, is no different than the journey I have been on since 2010, when I was diagnosed with an incurable form of leukemia with an expected life span of 7 to 9 years so told by western medicine. Certainly, I am not equating cancer with a SRA designation, but the journey is still the journey. With Cancer I spent a boatload of money and time to go down different paths to find a way to heal myself, to make myself better. That journey was similar to the journey I took to get my SRA, I wanted to be better. None-the-less if the AI falls, which is a definite possibility, my SRA will still sit on my bookcase as a reminder that I climbed a hill and got to the top and it made me better. Just like finding out last November that my eastern treatment I found out about has brought my blood counts back to normal, first time since 2008. I climbed that hill and for a moment I went “THANK YOU”. Same thing I said when I got my SRA. But it was not a defining end all moment that meant I was done; it was just a mileage post along the freeway. My take is that I will have lost nothing if AI goes down, other than I won’t have to send off $1,200 to an organization that makes me cringe.

To which I responded:

  • In your designation commentary, I appreciate the detail here and how well you are able to articulate your thoughts better than most. Yes, you are right. What education was gained by going through the process is not lost by the appraiser. However, they do lose something if others do not recognize the process the appraiser went through. That is why AI created the designations. It is a sign to the users of the appraiser’s services that the appraiser took that extra step to earn that designation through a respected institution. That’s really what “branding” is, and through marketing, it is AI’s responsibility to maintain the branding of the designations so outsiders appreciate their value. That’s the value added of the designation each appraiser invested in. When AI takes it for granted, they are shortchanging the appraiser and the effort they went through to achieve it by the lack of messaging the brand conveys to the consumer. Sure, the appraiser still has the knowledge and skills they obtained going through the process and is right to feel good about it. Still, when they started on the path to earning an SRA or MAI, I contend that part of the motivation to go through it was the prestige or potential commerce bump in obtaining it, that it would enhance the appraiser’s brand. I believe that benefit has nearly vanished with the SRA, and a large portion of the MAI brand has faded. That is the point I was attempting to make. AI took its members and the designations for granted, so here we are.

Did you miss the previous Housing Notes?

May 29, 2025

Housing Heat Versus Hotness

Image: REALTOR.com

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