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Fannie Mae and Freddie Mac have long been the government’s safety net for loans, but for the last 17 years, they have required a safety net of their own. That could change, signaling a seismic change for the real estate industry.
The two institutions are government-sponsored enterprises that provide mortgage financing and help make homeownership more accessible. They do this by buying mortgages from lenders, who then have more money to help other buyers, thus providing liquidity in the market and keeping housing stable and affordable. However, Fannie and Freddie had to be bailed out by the government during the 2008 financial crash and have been in federal conservatorship ever since—though amendments were made in 2021.
Tied to the Treasury Department, they are funded by American taxpayers, paying quarterly dividends in return. The government steps in to help them during tough times, as was the case during the financial crash of 2008. As per Donald Trump‘s remit, he plans to put a tight rein on federal spending. Fannie and Freddie are in the crosshairs.
Potential Cash Explosion
According to Reuters, the new government plans to privatize Fannie Mae and Freddie Mac, which are estimated to be worth hundreds of billions of dollars. The Wall Street Journal anticipates this would allow bankers to sell over $100 billion worth of shares at once, creating the biggest stock and bond offerings in history and attracting sovereign-wealth funds.
However, critics fear that an investment of such magnitude could destabilize the U.S. housing market, which relies heavily on the Federal Housing Finance Agency’s backing. According to Inside Mortgage Finance (as per the Wall Street Journal), about 40% of the $435 billion of residential loans originated in the second quarter of 2024 were sold to Fannie or Freddie, not including multifamily mortgage debt of which 40% is $2.2 trillion.
So why risk selling? To reduce the deficit. Opponents of privatization fear it will decrease access to credit for homebuyers, increase taxpayer risk, and increase mortgage costs.
“The conservatorship was always intended to be temporary, so it makes sense that policymakers release them from conservatorship now that reforms are complete,” a spokesman for billionaire John Paulson—a Trump backer and hedge fund manager who owns a sizable share of Fannie and Freddie shares—said in a statement to The Journal.
“The government will be the biggest winner in a release of [Fannie and Freddie]."
Banks widely expect Fannie and Freddie to go private. A recent survey by JPMorgan shows nearly half of mortgage-backed securities investors expect Fannie Mae and Freddie Mac to be privatized.
The financial sector has mixed opinions about a possible release from conservatorship through privatization:
Pershing Square Capital Management CEO Bill Ackman posted on X in December:
“A successful emergence of Fannie and Freddie from conservatorship should generate more than $300 billion of additional profits to the Federal government (this is on top of the $301 billion of cash distributions already paid to the Treasury) while removing ~$8 trillion of liabilities from our government’s balance sheet.” He added on Jan 16th, according to Barrons. “We have four years with a pro-business administration led by the consummate dealmaker, “This would be the biggest deal he’s ever done.” Should Fannie and Freddie be privatized, Ackman’s firm stands to make $7 billion.
PIMCO managing directors Libby Cantrill and Dan Hyman:
“Without an explicit government guarantee provided by Congress, mortgage rates will trend higher—and it could just be a question of whether rates are modestly higher or significantly higher.”
Kunal Patel and Alex Shvartser of DoubleLine.
“Further, privatization could carry significant execution risks and could adversely affect the secondary mortgage market, which could drive primary mortgage rates much higher.” The DoubleLine analysts wrote that the risk/reward balance is a “tenuous one.”
Getting a deal for Fannie and Freddie will likely be far from simple. DoubleLine analysts write that it would require administrative and legislative action, with approval from Congress likely to be a sticking point.
“Getting Congress, as it is currently composed with a slim Republican majority in both chambers, to agree on legislation related to GSE privatization also seems like a Herculean task,” the analyst said.
A big fear is interest rates. With government support for the two agencies, rates are liable to increase beyond the high 6% where they currently are, weakening the housing market.
