Love ‘em or hate ‘em, wish they’d stay exactly the same or wish they’d go away entirely, residential lenders have varying opinions about “the Agencies” or “Government-Sponsored Enterprises” Fannie Mae and Freddie Mac. Ever since both were put into conservatorship in 2008 (yes, 17 years ago), figuring out what to do with them has proven difficult and controversial, at best. With the beginning of a new presidential administration (“Trump II”), talk and actions have again resurfaced regarding a path forward. Originators and the lending community in general should be aware of Agency news and the actions of management.
In March, Fannie Mae and Freddie Mac shares jumped after new comments from Trump administration officials and a board shake-up at the companies drew fresh attention to their potential release from government control. But beyond the stock market, lending and housing experts see plenty of reasons to be skeptical about the end of the arrangement coming quickly and effortlessly, and without the cost of higher mortgage rates for consumers. The question will be, how much higher?
The Trump administration is considering sweeping changes to Freddie and Fannie, important pieces in the U.S. housing “ecosystem,” at a time when affordability is near an all-time low and home sales are mired in a years-long slump. Lenders know that Freddie and Fannie don’t make mortgages. But both play a crucial role in lending by buying up mortgages from banks and other lenders and packaging them into bonds comprised of home loans. The sale of those bonds to investors currently frees up money for more loans by lenders.
But if investors such as money managers, insurance companies, or pension funds become spooked about any piece of the ecosystem, it will impact the demand for mortgage-backed securities. The investors’ appetite to buy the bonds (mortgage bonds are a more than $10 trillion market) helps keep Fannie and Freddie’s borrowing costs and 30-year mortgage rates lower than home loan rates in most other parts of the world.
Fannie and Freddie have the government’s backing and share its top credit ratings, and therefore give investors comfort that their policies, procedures, and guidelines are stable. A major hurdle to privatization is how to preserve at least some of that backing. If investors perceive a private Fannie and Freddie as riskier, the companies will have to pay more to borrow, which would likely mean mortgage borrowers will pay more too.
The 2008 takeover and move into conservatorship reminded investors of Fannie and Freddie’s “implicit guarantee:” the idea that the government wouldn’t let such an important financial institution fail, even if it were private and no formal agreement about government support was in place. When the two companies entered conservatorship, that implicit guarantee became effectively explicit.
In the recent past, Treasury Secretary Scott Bessent, who seems to be spearheading privatization efforts on behalf of the Trump Administration, has said that plans to release the two companies will hinge on mortgage rates. At around 6.7%, rates today are more than one and a half percentage points higher than they were at any point during President Trump’s first term, and they’re at similar levels to where they were before Fannie and Freddie entered conservatorship in 2008.
Both Agencies are in much better shape than in 2008. Both are profitable, have shifted some risk away from taxpayers through “credit risk transfers,” and have built up their net worths to approximately $100 billion for Fannie and $50 billion for Freddie.
Fannie and Freddie would need some sort of government guarantee if/when they go private to continue without disruption, but President Trump is no stranger to disruption. Even a return to an implicit guarantee would likely raise mortgage rates. If any major market players, like top mortgage bond investors or ratings agencies, begin to question the government’s commitment to Freddie and Fannie, it will cause rates to move higher by .25% to 1.5%, depending on the process and perceived destabilization.
What is at risk? The United States could lose one of its primary engines that has generated trillions in wealth for its citizens through homeownership. Although they are often still called ‘GSEs’ (Government-Sponsored Enterprises’), in fact, while they are in conservatorship, they are not GSEs, but something very different: Government-Owned and Government-Controlled Enterprises. The proposed “release” transaction would give private shareholders control instead. Unfortunately, this could turn Fannie and Freddie back into GSEs, which many believe would be a mistake.
There’s one scenario that could result in lower rates: The government could formally back the companies before they’re released, giving them an even more explicit level of support than the current system. But that backstop would require an act of Congress, which is politically unlikely.
Any release plan will take time to develop given the complexities and the money involved. What we mostly hear is that an exit from conservatorship would be a “privatization” and Fannie and Freddie would again become “private” companies. But remember that to be a GSE means that you have private shareholders, but you also have a free government guarantee of your obligations. As long as Fannie and Freddie have that free government guarantee, they will not be private companies, even if private shareholders own them.
Vague statements from Freddie Mac or Fannie Mae, or FHFA Director Bill Pulte via the social media platform X do little to calm the industry or investors in MBS. For example, in early April, we learned from William J. Pulte, Chairman of the Board of Directors of Fannie Mae, that, “Since my swearing-in, we fired over 100 employees from Fannie Mae who we caught engaging in unethical conduct, including facilitating fraud, against our great company. Anyone who commits fraud against Fannie Mae does so against the American people.” What fraud was committed was omitted, although later word arose that it involved donations to bogus charities and kickbacks.
As GSEs before 2008, the companies always enjoyed such a hugely valuable but free government guarantee. Because they did, no private company could successfully compete with them. Former Democratic Congressman J. J. Pickle of Texas pointedly summarized the GSEs: ”The risk is 99% public and the profit is 100% private.“ It was always said that the government guarantee of the GSEs was only ‘implicit,’ but it was and is nonetheless fully and unquestionably real. The global sales of their securities and the credibility of the sponsoring government depend on this guarantee, and as we move through 2025 anything that endangers it runs the risk of spooking traditional investors in Agency MBS. The current debates must confront the fact that an ongoing government guarantee for Fannie and Freddie is an indispensable part of any “release” transaction.
We will hear new, or recycled, Fannie and Freddie release proposals within the government and our industry. These will highlight the financial essence of a GSE: the immense value of the free government guarantee is a gift to the private shareholders, with little benefit to first-time homebuyers in the current presidential administration. Public risk should not be turned into private profit. The government, and hence the taxpayers, should be fully and fairly remunerated for the risk and the cost of their massive guarantee. This will require legislation, and Congress must make sure it is part of any release transaction.
Fannie and Freddie’s business models are not sustainable without a government guarantee. Their business, their size in the bond market, their leverage, their access to credit risk-averse global investors, their credit standing, and their claim to lower mortgage interest rates all entirely depend on the government guarantee. The industry will be on guard for anything that impacts their attributes as changes will have a direct impact on every lender and borrower. Rob Chrisman
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