In a November interview, the nominee for U.S. Treasury Secretary Steven Mnuchin told Fox Business unequivocally that the privatization of mortgage giants Fannie Mae (FNMA) and Freddie Mac (FMCC) isn't merely a topic of interest for the Trump administration but that it is "on the Top 10 list of things we're going to get done."
Mnuchin's more recent comments, particularly those made during his Senate confirmation testimony, suggest that the hard-line stance may have softened on privatization of the two government-sponsored enterprises. But if recent experience has taught us anything, it is that the Trump administration moves very quickly when it decides to address an initiative.
That being the case, investors should be asking how they can profit from the privatization of Fannie Mae and Freddie Mac. The answers come from the equities, private-mortgage and real estate markets.
The equities market holds the most basic approach to profiting from the privatization of Fannie Mae and Freddie Mac. Although the U.S. government is the de-facto owner of both Fannie Mae and Freddie Mac by way of warrants allowing Uncle Sam to take over as much as 80% ownership of the entities upon demand, they still are publicly traded.
Mnuchin's comments on privatization have had an immediate and substantive impact on the share price for both Fannie Mae and Freddie Mac, leading to a clear conclusion: The market likes the idea of privatization. Thus, one approach to profiting from privatization could be to acquire shares of Fannie Mae or Freddie Mac, particularly because the sub-$5 share prices for both are more akin to options rather than equities.
Another area of opportunity is in the private-mortgage market.
If indeed the market for 30-year fixed-rate mortgages dries up, it seems likely that the U.S. banking industry could gravitate toward a system similar to that used in Canada. There, mortgages achieve borrower-friendly low payments via 25-year amortization, while mollifying lenders by including substantial prepayment penalties and a five-year balloon payment requirement.
However, many borrowers will remain who prefer the tried-and-true 30-year fixed-rate mortgage. Although it isn't likely that institutional capital will support these kinds of loans sans full insurance from the government, many enterprising individual investors will happily provide that type of funding outside the formal banking system through a form of financing called seller financing in which the seller of a property allows a buyer to purchase a property by making a down payment and a series of monthly payments rather than with one lump sum payment of cash.
Furthermore, these types of private seller-financed loans are frequently configured so that monthly payments are similar to local rental rates. In most cities across the U.S., this approach yields an effective interest rate for the seller-financed mortgage of about 10% annually and is thus very attractive for investors.
Finally, the real estate market presents an additional and perhaps the finest investment opportunity that could arise as a function of privatization.