Fannie Mae, Freddie Mac Privatization Carries Risks and Rewards for Real Estate

Even Fannie Mae (FNMA)’s CEO expresses doubt that the government was ever supposed to hold the reins of these enterprises so long. “Conservatorship was never meant to be permanent, right?” CEO Priscilla Almodovar told Bloomberg in January. Without being fully private, the two organizations “lose some commercial muscle” working with explicit government backing, she said. 

It’s a scenario that could be the plot of a sports movie: Can an old fighter get back in the ring, stand on his two feet, and win — even when the sport has changed? In addition to paying back every cent they received via a government bailout, Fannie and Freddie have built up a $150 billion capital backstop, finishing 2024 strong, and privatization rumors have sent their stock prices to recent highs. 

“Being in a conservatorship for this much time has caused some inefficiencies, caused some stagnation,” said Megan Booth, the Mortgage Bankers Association’s vice president of commercial and multifamily policy. “Being in a conservatorship has created some outside influences that aren’t necessary for Freddie and Fannie. We think there will be benefits to the industry from coming out of conservatorship, assuming they do it the right way.”

The federal government might be sad to see them go, which itself might be an argument for privatization. Brian Reilly, a GSE stockholder, notes that the government sees a benefit from conservatorship when Fannie and Freddie are doing financially well. As he puts it, they’re “milking a cow.” 

But as much as conservatorship for the ​​Federal National Mortgage Association (Fannie) and Federal Home Loan Mortgage Corporation (Freddie) has helped the GSEs bulk up, there’s still lots of risk to stepping out from the government’s umbrella, especially in today’s relatively high mortgage rate environment.

Fannie Mae and Freddie Mac (FMCC) provide necessary liquidity to the multifamily lending market in particular by purchasing loans and packaging them into mortgage-backed securities. By supporting roughly 70 percent of the overall mortgage market, according to the National Association of Realtors, these institutions have become bedrocks of U.S. housing policy and buttress the 30-year, fixed-rate mortgage. The To-Be-Announced Mortgage Market, which consists of contracts to buy and sell mortgage-backed securities in the future, has an average daily trading volume of $290 billion, making it one of the planet’s most liquid markets. 

By improving capital access, the GSEs keep alive funding and financing, and help make financing more accessible for affordable housing developers. Collectively, they own about $1 trillion in mortgages right now. There’s a view, then, that if the system isn’t broken, why start shifting around the financial backstop of the nation’s mortgage market?

Any disruption of the status quo carries great risk of upending an already challenging housing market. Moody’s economist Mark Zandi has estimated that without a government backstop of the two mortgage giants, mortgage rates could go up 60 to 90 basis points (although privatization advocates argue the opposite would happen). The political leader or party who would break the mortgage market would very much own it, too. As ​​Laurie Goodman, founder of the Housing Finance Policy Center at the Urban Institute, told The New York Times earlier this year, “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?” 

The privatization push would continue an effort that the first Trump administration tried to kick off in 2019. When Fannie Mae and Freddie Mac went into conservatorship in September 2008 to stabilize the housing market after a financial collapse — when 3.8 million homes had been foreclosed on — there wasn’t any clear exit plan. There still isn’t. The closest plan might be a White House memo released in March 2019 that was followed by a September housing finance reform map that year that laid out steps for an exit from conservatorship. 

Trump’s plan was to recapitalize the GSEs, create an orderly transition, and shrink the size of the GSEs, all to promote a more level playing field with the private market. Trump would later write that he would have “sold the government’s common stock in these companies at a huge profit and fully privatized the companies” if he was able to overcome pushback from Obama appointee Mel Watt, then director of the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie.

There’s much less pushback this term. Scott Turner, the new secretary of the U.S. Department of Housing and Urban Development, said he’s looking to prioritize Fannie and Freddie privatization. The former NFL player said he’d act “as a quarterback” and “work with the entire huddle” to get it done. 

Trump also now has Bill Pulte, still head of private equity firm Pulte Partners, in the saddle at FHFA, who displays no subtlety about his plans to rapidly “Make Mortgages Great Again,” as he posted on X on March 15. A few days after a close confirmation vote, Pulte fired 14 of 25 board members from Fannie and Freddie without a stated reason and installed himself as chairman of both, then sent a stern letter about requiring FHFA workers to return to the office five days a week within 45 days. 

And Pulte’s political ally and backer Bill Ackman, founder and CEO of hedge fund Pershing Square Capital, has been a cheerleader for privatization, with strong stock ownership in both GSEs that could see him net hundreds of millions of dollars if conservatorship ends.

While there’s plenty of momentum around finally finishing off privatization, and expectations that more private control could even lead to a wider variety of mortgage options and products, there’s also concern that obsession with finishing the job obscures why this may be a bad time to set the GSEs free. The biggest worry is the potential hit to liquidity in the mortgage market.

At the same time, Fannie and Freddie announced plans late last year to tighten their underwriting standards in an effort to cull fraudulent claims for loan processing — a change that would impact the entire approval queue. That would in turn mean additional time and costs for borrowers. 

Neil Shapiro, partner in the real estate practice at New York City law firm Herrick Feinstein, told Commercial Observer in September that these proposals could add 45 to 90 days to multifamily loan closings, a significant delay that shows how all borrowers would be “suffering the consequences of having to learn the new process.” The angst around that shift foreshadows how much a bigger change at Fannie and Freddie might temporarily unmoor the mortgage market.

Plus, there’s the sheer cost of going private. The government rescue of Fannie and Freddie during the $187 billion 2008 bailout came in the form of senior preferred stock purchase agreements. In 2021, the GSEs were allowed to retain capital, which has also increased the amount of the taxpayers’ stake in the companies. Janus Henderson Investors estimates the net worth of Fannie and Freddie to be north of $147 billion.

The capital required to take the firms private, roughly $280 billion, could take up to seven years to acquire. It could also be raised through an initial public offering that would make the record-setting $29.4 billion Saudi Aramco IPO in 2020 look tiny by comparison. More likely, a series of offerings would happen over time, with the government keeping some stake in the GSEs. 

Pulte’s pushing out of Fannie board members also included a new replacement, Christophe Stanley, a SpaceX exec with ties to Elon Musk’s Department of Government Efficiency (DOGE) efforts. It’s gotten Urban Institute experts to warn of a potential “DOGE-like intervention” in reference to the rapid firing and contract cancellations found at other federal agencies. That intervention might’ve already begun this week. The FHFA closed two of its divisions and laid off nearly 10 percent of its staff, according to media reports. HUD’s paring staff, too. 

Pulte and Treasury Secretary Scott Bessent have said they want Freddie and Fannie to go private, but not at the cost of disrupting mortgage rates. Doing so anytime soon might again be much more complicated and time-consuming than privatization advocates expect. Maybe that’s why Pulte in mid-March talked of “significant study” around the issue.