Bill Pulte Faces Big Questions On Capitol Hill Over Fannie Mae Privatization

There’s broad consensus from Congress to Wall Street that President Donald Trump will move to end federal oversight over Fannie Mae and Freddie Mac during his second term. But there’s little agreement on when it will happen or what it will look like. 

“No one really knows the answer, and anyone who tells you they know exactly what the rollout will look like is speculating,” said Michael Hanin, an attorney with Kasowitz Benson Torres who also represented the government in lawsuits against banks after the stock market collapse in 2008.

Some early answers could emerge during Thursday’s confirmation hearing for President Donald Trump’s nominee to lead the Federal Housing Finance Agency. Bill Pulte, Trump’s pick and a member of the family behind homebuilder Pulte Group, is set to be grilled by Sen. Elizabeth Warren, including for insight into the administration’s plans for Fannie and Freddie.

Bill Pulte, the nominee to lead the Federal Housing Finance Agency, and Secretary of Housing and Urban Development Scott Turner this month.

Warren, a Massachusetts Democrat and the ranking member of the Senate Committee on Banking, Housing and Urban Affairs that Pulte is set to appear before, published a 23-page open letter Monday with dozens of questions for Pulte about the end of conservatorship and other issues. She requested that he come prepared to answer them at the hearing.

The federal government’s stewardship over Fannie and Freddie is a product of the Great Recession, when the subprime mortgage crisis led the government to step in to guarantee loans and buy a majority stake in the lenders. A host of legislation governs how the government’s oversight is carried out, but there are very few rules about how and when it can end.

The window of conservatorship was a key focal point of Warren’s questions to Pulte ahead of his testimony Thursday. The sweeping scope of her questions — Congressional approval, timing, capital requirements and the future of the government’s $445B in preferred stock agreements make the list — underscores just how much leeway the White House has to end oversight. 

Warren and the FHFA didn’t respond to a request for comment.

The government’s takeover of Fannie Mae and Freddie Mac codified what had been an implicit guarantee that the federal government wouldn’t allow the widespread default of mortgage-backed securities. 

On paper, the end of conservatorship would bring an end to that guarantee. But  the Trump administration is widely expected to introduce a replacement program to avoid disruptions in the mortgage-backed securities marketplace. 

The most widely floated proposal would have the government run a secondary market to insure the mortgage securities, with the note holders paying a premium to guarantee their debt. 

“You have a handful of small government conservatives, to the extent they still have any voice in the Republican party, who would prefer that there be no explicit or implicit guarantee of the mortgage market,” Hanin said. “Those voices are virtually certain to be drowned out by those who believe that mortgage rates are lower because of the implicit guarantee.” 

Advocates for the end of conservatorship say that it would allow Fannie and Freddie to be more nimble, reacting faster to changes in the housing and debt markets and offering more creative solutions to homebuilders. But for the power of privatization to take hold, the government would first have to sell its majority stakes.

Fannie Mae and Freddie Mac are cornerstones of the $11T mortgage-backed securities market.

In the depths of the Global Financial Crisis, the federal government shored up the mortgage market by committing to warrants to buy up to 80% of Fannie and Freddie stock. 

What happens to those stock purchase agreements will be a crucial facet that determines how the broader mortgage market will operate in a post-conservatorship environment, and Warren has asked Pulte for his position on what to do with the contracts. 

“Just because conservatorship ends doesn’t mean that government control similarly ends,” Hanin said.

The Trump administration could push to make the federal government a minority shareholder in the firms and cede its control over their boards, executive leadership and debt offerings. But it’s not guaranteed the Trump administration will fully hand over the reins to private investors, and Hanin said he expects the government’s position in the firms to be a key negotiating point.

Whatever the size of the stake the federal government decides to sell, it is unlikely to be pushed onto the public markets in a single offering.  

Fannie and Freddie are by far the most active participants in the $11T mortgage-backed securities market, which saw $157B in January issuance alone, according to trader-broker trade organization Sifma. If the government were to offload its entire stake in one go, it would dwarf any prior initial public offering and likely pull down the share price, Hanin said. 

“There’s some investment banker at Goldman or Houlihan who will be paid tens of millions of dollars to decide how to kind of monetize this position,” Hanin said. “But you can see a world where, rather than liquidating those shares all at once, you would do it in a series of offerings.” 

Massachusetts Sen. Elizabeth Warren at a rally this month advocating for keeping the Consumer Financial Protection Bureau.

Wall Street investors expect some type of stock sale. Shares of Fannie and Freddie, which are traded publicly over the counter, are up more than 400% since Trump resoundingly won a second term in November.

Warren signaled concerns about the potential for the government to tip off major shareholders to its plans in her letter. She asked Pulte to disclose any conversations he’s had about a potential stock offering with administration officials as well as Pershing Square CEO Bill Ackman and billionaire hedge fund investor John Paulson. 

Pershing Square reported owning just under 10% of Fannie Mae’s stock in 2014 but soon after indicated it would stop disclosing changes of its position. Fannie Mae said in its most recent annual filing that it didn’t know the size of Pershing Square’s holdings. Paulson’s eponymous hedge fund is also reported to have a large stake in the firms. 

Warren is looking to probe Pulte’s own investments. The grandson of Pulte Group founder William Pulte, the FHFA nominee is not part of the homebuilding company and instead leads an investment firm named Pulte Capital.

Pulte’s financial disclosures show his investments, which total at least $190M, include interests in more than 10 HVAC companies and rental properties, Bloomberg reported. He also made money from investments in meme-stock Gamestop and cryptocurrency firm MARA Holdings.

Warren requested that Pulte provide a detailed list of any housing-related investments, including any stakes he or his family’s wealth investment office has in Fannie or Freddie.

Republicans in Congress are in the early stages of putting together a budget that aims to cut taxes and slash spending. But the House of Representatives plan, which includes $2T in cuts to federal spending, would add roughly $3T to the deficit over ten years. That could make a one-time cash infusion from a stock offering an attractive prospect, Hanin said.  

“My gut is that, if this offers a way to put up a trillion-dollar positive on the [Office of Management and Budget]’s scoreboard for a big, beautiful bill, it’ll happen faster than people think,” he said.