Privatizing Fannie Mae – A Big Opportunity? [EPISODE #248]

by | Feb 28, 2017

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Privatizing Fannie Mae – A Big Opportunity? [EPISODE #248]

by | Feb 28, 2017

The Big Idea

Treasury Secretary Steve Mnuchin has said he plans to privatize Fannie Mae and Freddie Mac.  But will he really?  If he does, there's a great opportunity lurking...

Points To Ponder

  • Treasury Secretary Steve Mnuchin said very unambiguously that privatization of Fannie Mae and Freddie Mac are high priorities and can be accomplished quickly
  • That was welcomed news to current shareholders, who have been the victim of the Fannie/Freddie bailout in 2008
  • If privatization of Fannie Mae and Freddie Mac happen, the market for 30-year fixed rate mortgages will likely disappear
  • The reduction of funding will likely cause a temporary diversion of the price of real estate and it's value, thus creating a strong buying opportunity for cash buyers
  • Seller-financing-oriented investors stand to fare very well... but Dodd Frank must first be repealed, which is also a Trump objective

Resources

Full Transcript

When the words “privatization” and “Fannie Mae” are used in the same sentence, everybody pays attention.  When those words are used by President Trump’s Treasury Secretary Steven Mnuchin, the earth shakes.  Here’s what he said, how it will affect your portfolio, and my prediction as to whether and how it will happen.  Hint:  Think “Price versus Value”.  I’m Bryan Ellis.  This is Episode #248 of Self Directed Investor Talk.

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Hello, SDI Nation.  Welcome to the show of record for savvy self-directed investors like YOU where each day, you learn how to find, understand and profit from EXCEPTIONAL investment opportunities.

Today, we focus on what COULD become just such an exceptional investment opportunity concerning the PRIVATIZATION of Fannie Mae and Freddie Mac.

A brief and very interesting lesson on recent history is in order here.  But first, a quick work from our sponsor, Fund & Grow.

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Almost exactly two months ago, Steve Mnuchin, then-President-Elect Donald Trump’s nominee for Secretary of the Treasury, announced with bluster that privatizing Fannie Mae and Freddie Mac were a high priority for the Trump administration, telling Fox Business that privatization is “right up there on the top-10 list of things we’re going to get done”, thus proving instantly that Mr. Trump isn’t the only member of the new administration who has a penchant for market-moving comments, as shares of both mortgage giants – both of whom are publicly traded – bolted upwards by nearly 50% on that single day, as private investors who have been totally RIPPED OFF by the government’s involvement seized upon excitement that their nightmare might be over.

That nightmare being, of course, that when Fannie and Freddie were “taken over” by the Feds in 2008 in an emergency rescue that cost taxpayers $187.5 BILLION, a most unusual arrangement was created:  The U.S. government would not technically “own” Fannie and Freddie, but would instead be entitled to take ownership of about 80% of the companies anytime it wanted, and in the meantime, the profits generated by those entities would be siphoned to the federal government, directly cutting out both the actual SHAREHOLDERS and totally crushing the ability of both companies to accumulate the capital they would need to operate in the future.  So clearly, it was music to the ears of current shareholders that privatization may be on the way.

And the government has benefited tremendously from this arrangement.  The investment for this unusual – and some say fraudulent – arrangement was $187.5 billion… but Fannie and Freddie have since pumped over $250 BILLION back into the federal coffers.

So what will happen?

At the time, Mnuchin didn’t give much shape to his intentions, other than to say that “we’ll get it done reasonably fast.”

So… my thoughts on how this is likely to affect me and you… and my predictions on whether it will ACTUALLY happens… are as follows:

If Fannie & Freddie are privatized, that would likely mean there’s no federal money backing the most popular type of mortgage – the 30-year fixed rate mortgage.

Now I’m not sure if you realize, but the 30 year fixed mortgage isn’t a particularly popular type of investment for institutional capital because borrowers can repay anytime, and they can refi whenever rates drop.  So if the government stops guaranteeing these loans through Fannie and Freddie, odds are good that there could be a bumpy road for people seeking mortgages – particularly for first-time home buyers – at least for a period of time.

Given the unattractiveness of that type of lending product, it’s plausible that some other solution would replace the 30-year mortgage… maybe even something like the Canadian system in which, generally speaking, loans are capped at 5 years but are amortized for 25 years, keeping payments relatively low, but are also portable in the event a borrower moves to a new residence.

Of course, the monstrous Dodd Frank Act would have to be undone for that to happen.  And as it turns out, just this morning there’s news out from the Wall Street Journal that Trump plans to do exactly that.  The link to that is on today’s show notes page at SDITalk.com/248.

But whatever solution ultimately arises, the predictable near-term result would be downward pressure on real estate prices as property becomes decreasingly available to everyone EXCEPT for cash buyers.

And THAT is where the opportunity lies, my friends.  I don’t think that the pricing downswing will be anywhere close to the drop that accompanied the mortgage crisis of nearly a decade ago – can you believe it’s been that long? – but that circumstance gives an example of what I expect could happen in the wake of a Fannie/Freddie privatization, in which prices are forced down and funding dries up, leaving plenty of choice and opportunity on the table for investors willing to pay CASH.

And there’s nothing bad about OPPORTUNITY, my friends.

For a while, there would be skyrocketing rental prices, which would ultimately level off as America adjusts to a new reality in home funding.

I also suspect that there would be a surge in PRIVATE mortgages… seller financing, specifically… in which the seller acts as the bank for the buyer, but at an interest rate that’s higher than the typical market rate.

Bottom line:  privatization of Fannie and Freddie would likely cause some short-term chaos – probably 12-24 months in duration – during which time the PRICE of real estate will decline, even though the VALUE won’t.  And when THAT particular inversion takes place, it spells one thing:  OPPORTUNITY.

So my advice, if Fannie & Freddie are privatized, is:  Be ready with cash.  Lots of cash.

Having said that:  I don’t think it will happen soon, maybe not at all.  In his Senate confirmation testimony, newly confirmed Treasury Secretary Steve Mnuchin made comments that suggest he’s softened substantially on Fannie/Freddie privatization.

You know, I can’t say why it is, but Mnuchin is the only one of Trump’s cabinet appointees that just makes me fundamentally uncomfortable.  I don’t know why.  It’s a gut feeling that may fade.  But for now, Mnuchin makes me think…. Hmmmmmm….

That’s all for today, but my friends… there’s SO MUCH on my mind to share with you!  In fact, on the next episode of this show – the link to which is quite likely already posted on today’s show notes page at SDITalk.com/248 – we’re going to look into a DIFFERENT way of investing in turnkey rental property that makes it EVEN MORE hands-off, like investing in a mutual fund… I’m not sure how I feel about this approach yet, and I’d LOVE to hear your opinion on it, so please be sure to tune in, because I value your opinion.

In the mean time, remember:  There’s a WEALTH of episodes just like this over at SDITalk.com, just waiting for you, and all totally free.

I sincerely thank you for listening.  And remember:  Invest wisely today, and live well forever!

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Bryan Ellis is host of Self Directed Investor Talk, America's #1 radio show and podcast for affluent self-directed investors.  He's also an expert in self-directed IRA's, solo 401k's and turnkey rental property investing... at least, that's what his wife tells him 🙂  He's a contributor to well-respected publications like TheStreet.com, Entrepreneur and ThinkRealty.  Bryan lives in metro Atlanta, Georgia with Carole Ellis - his wife, business partner and best friend - and his 4 children ranging in age from 2 to 19.