How Privatizing Fannie Mae and Freddie Mac Could Have Seismic Impacts On Real Estate

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As Britney Spears once was, Fannie Mae and Freddie Mac—the government safety net for loans—have been in conservatorship for far longer than anyone imagined possible. It began in 2008 amidst the financial crash, but unlike the pop siren, the two government-sponsored enterprises (GSEs) are still in it, though amendments were made in 2021.

In Fannie and Freddie’s case, there was no Netflix documentary or campaign to free them. Instead, President Trump has long since made it his mission to privatize the two government mortgage-backing juggernauts and, in doing so, release billions of dollars of shares into the stock market. It could also cause seismic changes in the real estate industry, including mortgage rates.

Scott Turner, the incoming secretary of Housing and Urban Development, said in a recent interview that he was prioritizing the privatization, coordinating his efforts with the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie. In the background are Trump’s backers, such as hedge fund manager Bill Ackman, a shareholder in the companies, who stands to profit billions from the stock sale, attempting to push the deal through.

“There are partners that will be at the table, and obviously, we’ll be one of them,” said Turner, a former NFL player and Texas lawmaker. “When you’re a quarterback, you’ve got to work with the entire huddle.”

What Fannie and Freddie Do

Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are government-sponsored enterprises that purchase mortgages from banks and lenders, package them into mortgage-backed securities (MBS), and sell them to investors. They operate independently and are crucial in maintaining liquidity in the housing market, ensuring banks have enough capital to keep lending to homebuyers and investors. By making more loans available, Fannie and Freddie also help stabilize mortgage interest rates.

The Roots of the Conservatorship

Trouble began for the duo in 2007 when homeowners began to go into default en masse, and the GSEs were unable to bail out banks because they had insured too many bad loans. The federal government had to step in with a $187 billion bailout in 2008 to stop the two backers from filing for bankruptcy, potentially creating chaos in the lending arena.

Privatization: A Potential Cash Spigot

Trump began exploring privatization during his previous term but was upended by the COVID-19 pandemic. It wasn’t a priority for the Biden administration. Proponents of privatization contend that it will allow more market share for other mortgage finance firms. They argue that relying so heavily on two companies to back so many loans makes for risky business—which is why they were bailed out in the first place.

Additionally, the money that privatizing Fannie and Freddie would create could help with the government budget deficit. Both companies are no longer beholden to the government, as they have long since paid back the $187 billion bailout cash they received in 2008. However, the Treasury still holds a tremendous amount of equity in the two companies that could be worth nearly $190 billion, according to the New York Times article.

What Privatization of Fannie and Freddie Could Mean for Homebuyers and Investors

Much of the fallout will depend on the support the government is prepared to offer Fannie and Freddie after privatizing them. Without support, they would not be considered such a safe bet, which could affect their credit rating and the cost of borrowing money, causing mortgage interest rates to increase. However, a possible clause indicating that the government would still have Fannie and Freddie’s back should things go south could potentially ameliorate the situation.

What Makes Fannie and Freddie Work

Tied to the Treasury Department, the companies are funded by American taxpayers, paying quarterly dividends in return. This allows them to buy existing home loans from mortgage lenders. Fannie and Freddie either keep or sell the loans as mortgage-backed securities to investors, creating a system where mortgage lenders have enough capital to continue offering loans.

“The 30-year fixed-rate mortgage might not exist without them,” Andy Winkler, director of housing and infrastructure projects at the Bipartisan Policy Center, told CNBC. The two companies support around 70% of the mortgage market and remain vital to the housing system in the U.S., according to the National Association of Realtors (NAR).

A Lengthy Process

Despite talk of prioritizing the process, privatization is unlikely to happen quickly. 

“It’s not something you can do with one signature on one agreement,” Susan Wachter, a real estate and finance professor at the Wharton School of the University of Pennsylvania, told CNBC. The process involves multiple parties agreeing to the sale. These include the Treasury, the Department of Justice, FHFA, and shareholders in the private sector. 

Opponents of the sell-off hope these checks and balances will prevent privatization from proceeding. “Based on the economics of it all, there should be no chance that they get released administratively,” Mark Zandi, chief economist at Moody’s Analytics, told CNBC. “It doesn’t make any economic sense.” 

“A release is a lose-lose for taxpayers, homebuyers, the housing market, the economy; everybody is worse off than the status quo,” Zandi said. “What problem are we trying to fix?”

Laurie Goodman, founder of the Housing Finance Policy Center at the Urban Institute, a Washington think tank, told the New York Times that privatization could result in more expensive mortgages.

“Do you want the current system, which isn’t broken, or what is behind door No. 2, and we don’t know what it is?” she said.

Final Thoughts

There’s little question that current shareholders would stand to profit most from a potential sale. However, if the Trump administration wants to keep peace with voters and safeguard lower interest rates, it needs to tread very carefully. 

A recent report by the Congressional Budget Office found that if Fannie and Freddie were put on a path of becoming independent in 2027, the companies would have about $208 billion in combined capital by the end of 2026, which would be a huge help should another financial crash happen. However, they would still need to raise tens of millions in capital from a stock sale to facilitate this further while paying back investors and the federal government on the equity they currently hold.

Clearly, Freddie and Freddie were not meant to be in permanent conservatorship. However, privatizing them for an immense profit for the extremely wealthy while homeowners and smaller investors suffer from higher interest rates would create terrible optics.