Fannie, Freddie Privatization: Here’s What Could Happen

The old saying is “If it ain’t broke, don’t fix it,” but when it comes to the second Trump administration’s approach to government, the mindset appears to be, “Break now, fix later.” 

With apologies to the Federal Emergency Management Agency and the U.S. Agency for International Development, no agency might soon best encapsulate the Trump administration’s ethos to tear down existing government structures than national mortgage giants Fannie Mae and Freddie Mac, which Trump plans to privatize. Fannie and Freddie have been under federal control, or “conservatorship,” through five presidential administrations, or since the 2008 Global Financial Crisis (GFC) pushed both entities to the brink of bankruptcy. 

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Today, the entities carry a loan portfolio estimated at $7.5 trillion and are under the control of the Federal Housing Finance Agency (FHFA), which was established in July 2008 after Congress passed the Housing and Economic Recovery Act.  

“The first thing to realize is conservatorship was meant to be a short-term solution — it wasn’t meant to be this suspended animation that both entities find themselves in today,” said Clifford Rossi, a professor of finance at the University of Maryland. “They are the last vestiges of the financial crisis that remain unresolved.” 

The signs pointing toward privatization have been present all year and even began during the first Trump administration in the late 2010s. They now appear to be entering into overdrive. 

On Aug. 8, Trump and top lieutenants such as Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick summoned CEOs from the six largest banks, including J.P. Morgan Chase, Citigroup and Wells Fargo, to discuss their plan to sell up to $30 billion in preferred shares of Fannie and Freddie on the open market, the Wall Street Journal reported. It would be the largest initial public offering in history and reportedly could come before the end of this year. 

However, the plans for privatization, or release, remain hazy, particularly regarding the question of whether to merge the entities into one corporation or take them public as two competing firms. And. it’s unclear whether the Trump administration would keep either an implicit (or explicit) guarantee to bail out and backstop the mortgage giants in the event of another black swan development like the GFC. 

Trump, whose word isn’t exactly a money-back guarantee, has pledged to keep the implicit backstop in place. But, when it comes to Fannie and Freddie, there is no room for empty vows or a political bait-and-switch. 

Since the Great Depression in the 1930s, Fannie Mae — aka the ​​Federal National Mortgage Association — has been the foundation for the expansion of U.S. single-family homeownership. Beginning in the 1970s, Freddie Mac — the Federal Home Loan Mortgage Corporation — became the force behind the mortgage-backed securities issuance that fuels American residential development to this day. 

By buying and selling mortgages originated by banks and other lenders, and either holding them on their books or turning them into securities, the entities free up capital and generate liquidity to juice the nation’s housing market. They allow pillars like the 30-year home mortgage to exist, and create underwriting standards so that affordable loans can find a place even in markets pressured by low housing supply.  

Due to their synonymous nature with the 30-year mortgage for home sales, Fannie and Freddie are often undervalued in the multifamily rental market, despite the agencies’ roles as two of the largest lenders in the multifamily space; the entities claimed a 58 percent share in multifamily apartment lending in 2023. 

“They’re a huge source of debt that allows owners to keep rents down because their borrowing cost is low,” said Neil Shapiro, a partner at Herrick Feinstein. “Their mission is to provide lower costs for home borrowers, and, while it doesn’t get much play, they are also a significant player in the multifamily space.” 

All in all, the two firms support nearly 70 percent of the overall mortgage market, according to the National Association of Realtors, and have built up at least a $150 billion war chest since falling under government control 17 years ago. That’s money that Trump and his allies believe can be spent on reducing government debt or projects that benefit taxpayers. 

“In general, when you bring private money and private incentive, you bring more efficiency and innovation and discipline, different underwriting models, which is very valuable,” said Shimon Shkury, the president and founder of Ariel Property Advisors. “The competitive nature of the private sector is super important to enhance lending and liquidity.”

But there’s a second school of thought that is more skeptical of the likely privatization and frankly alarmed at the speed at which Trump and his acolytes are moving. 

These skeptics recognize that any legitimate privatization would be a complex, multiyear process that includes almost all residential lenders and borrowers, who depend on Fannie and Freddie for affordable, competitive mortgage credit; mortgage-backed securities investors, who make up a daily trading market of $290 billion; equity investors for the two entities, who could make a killing after privatization but also encounter risks down the line; and, of course, the U.S. taxpayer, who might benefit from the money generated by an IPO, but would almost certainly be asked to foot the multibillion-dollar bill in the event of another bailout.  

More than anyone, the average American homebuyer is likely to be impacted by a privatized Fannie and Freddie, which will find themselves thrown into the deep end of corporate finance and asked to compete with much leaner, hungrier and cost-effective lending operations on the price of home loans. 

“The truth of the matter is, if markets look at their scheme, they’ll reprice risk, and, if the spreads widen out, then mortgages will get more expensive,” said Glenn Brill, a managing director of FTI Consulting, a financial advisory firm. “Some economists think privatization will almost immediately drive up home mortgage rates 100 basis points.” 

This is at a time when the 30-year, fixed mortgage rate stands at 6.65 percent — higher than any point since 2007, excluding the multidecade highs in 2023 and 2024— and the nation finds itself in a generational affordability crisis, with the annual housing stock growth rate slowing from 4 percent in the 1950s to 0.6 percent in the 2010s, according to the Brookings Institution. 

“I don’t think it makes a whole lot of sense, or any sense, to release them without an explicit federal government guarantee,” said Mark Zandi, the chief economist at Moody’s. “And no one is talking about that at this point, so I don’t see any benefit to doing it, and, in fact, I can see significant potential downsides to doing it.” 

Home for the holidays

Before breaking down the pros and cons of privatization, let’s start with how we got here. 

Fannie Mae emerged in 1938 from the wreckage of the Great Depression. As one of the hallmarks of President Franklin Roosevelt’s New Deal, Fannie would forever change the face of homeownership finance in America. Prior to its introduction, home loans were only made by local banks, who would hold them on their books, thereby reducing liquidity. The banks would mainly offer terms like 50 percent down payments attached to five- or 10-year mortgages — no doubt contributing to a relatively low 47.8 percent national homeownership rate by 1930, according to the Joint Center for Housing Studies at Harvard University. 

But then Fannie Mae ensured banks’ credit risk on home loans by buying and selling their debt, and Freddie Mac began doing the same for savings and loan institutions in the 1970s. Once both Fannie and Freddie began packaging the debt into securities, the mortgage origination process spun into high gear. The share of American homeowners rose to 63 percent by 1965 and grew to a high of nearly 70 percent by the mid-2000s.

These two entities, though, which still operated as private corporations despite their government origins, got into trouble — as did many financial institutions —  in 2008, after underwriting millions of underwater single-family home mortgages on the secondary market. These were simultaneously packaged into lucrative mortgage-backed securities that infected the entire financial system. Rather than allow Fannie and Freddie to declare bankruptcy, the U.S. government rescued them through a $187 billion bailout via preferred stock purchases that required quarterly dividend payments. 

  

Mike Fratantoni, the chief economist at the Mortgage Bankers Association, said that the post-GFC legislation of Dodd-Frank and other regulatory reforms have created a much safer system. Now, loans originated and purchased by agencies must hold 10 times the capital requirements as during their 2000s heyday. 

“When they were put into conservatorship in 2009, Treasury Secretary Hank Paulson described it as a time-out for a business model that took on too much risk,” said Fratantoni. “Seventeen years of administrative reform has led the enterprises to be on much firmer footing, and from a safety and soundness perspective, systemwide, we’re in really good shape.” 

Even so, many agency-watchers believe the entities should not only return to the private sector, but also should probably be consolidated into one entity, as each offers similar products, and buys and packages similar loans, differing only in the guaranteed fees and terms at each origination.  

“Combining them is sensible because they have the same business model, same customer base, so you don’t need two, and the truth of the matter is part of their problem before really stemmed from competition between them,” said Brill. 

Others, like Rossi, have argued that keeping the agencies as competing entities creates a dangerous incentive to lower credit standards on loans, in turn initiating a race to the bottom for the same type of loan approvals that helped grease the skids for millions of unqualified mortgages that proliferated across the system in the 2000s. 

Shapiro agreed the system doesn’t need two sets of firms with two sets of similar managers, but was skeptical of the notion of a race to the bottom, as interest rates can be just as competitive as underwriting standards. He did, however, express caution toward the idea of a single private entity controlling more than two-thirds of the U.S. home mortgage market. 

“When you remove a major competitor, because they are competitors with each other, it changes the marketplace as there is only one source of funds,” Shapiro said. “If one entity accounts for 70 percent, instead of two different ones, that’s a big monopolistic control issue. They could exert their own pricing and, with less competition, pricing goes up.” 

Others emphasized that Fannie and Freddie already exert monopolistic control over a mortgage marketplace they have the power to manipulate. Toby Cobb, a co-founder and managing partner of 3650 Capital, noted that the agencies represent “a vast majority” of national residential lending, and that other AAA bonds in the private marketplace cannot compete against securities issued by Fannie and Freddie that carry an implicit guarantee of government protection. 

“It is clear that the agencies have taken over and distorted market outcomes,” said Cobb. 

He suggested a privatized Fannie and Freddie ought to remain as the liquidity provider of last resort, much like the Federal Reserve System serves as the lender of last resort. But Cobb also pointed out that “a vast majority” of agency loans are marketplace loans that benefit large multifamily development and management firms (think Equity Residential, AvalonBay Communities or Greystar). A federal agency like the Department of Housing and Urban Development, he added, could do a better job of making affordable housing loans available for lower-income Americans and mom-and-pop small property owners.  

Roughly 25 percent of Fannie and Freddie single-family loans purchased must target affordable buyers, while a full 61 percent of multifamily loans purchased by the agencies must include some affordable unit construction, according to 2025 to 2027 FHFA guidelines. 

“There’s definitely a distortion in the markets because Fannie and Freddie exist,” Cobb said, “but I’d also suggest there’s plenty of private capital that would take the place of a landscape absent Fannie and Freddie.” 

And it is the role of private capital that is worrying residential and multifamily players the most, as the sudden rush of private lenders into the mortgage space could create unfavorable credit standards at a time when many borrowers are struggling to afford their properties. 

A new landscape 

For many affordable housing developers and workforce housing owners and operators, the prospect of a privatized Fannie and Freddie is disconcerting. This is because these owners rely on the agencies for lending products that incentivize them to buy older, vintage housing properties that come with lower rents and more capital requirements. 

Ron Kutas, the CEO of OneWall Communities, a national leader in workforce and affordable housing, said that his biggest concern is “mission drift risk” within a privatized agency system that must compete with market-rate firms. These firms prioritize high returns over financing affordable housing loans, thereby generating far less liquidity for older workforce housing properties than is available today. After all, why would the average private lender take on more risk for lower returns?  

“The flight to quality in multifamily is real. Joint venture partners, institutional equity partners, are looking for newer vintage products [that] are less affordable in general,” said Kutas. “If Fannie and Freddie pull away from mission-driven products, then I think you’ll see real issues in the marketplace we’re in.” 

The University of Maryland’s Rossi, who served as head of mortgage credit policy at Freddie Mac from 1999 to 2001, said that both single-family mortgages and multifamily loans are likely to see somewhat higher interest rates as a result of privatization. These could range from a quarter of a point to half a percentage point, due to the market’s appetite for Fannie and Freddie loans changing from higher debt service. 

“Is it going to lower rates? Not likely,” he said. “We’ll probably see slightly higher rates than we see today.”  

Unfortunately, the lack of transparency by the Trump administration on how exactly this will be executed hasn’t tamed wary skeptics. 

“One of things I’m scratching my head about is the administration hasn’t articulated why it should be privatized,” said Stuart Boesky, the CEO and founder of Pembrook Capital. “It’s working fine, it’s providing reasonably priced, long-term financing [for housing].”

The Trump administration has argued that its privatization bid would be a boon for taxpayers. The Treasury Department holds warrants to purchase 80 percent of common stock related to the agencies and believes the entities would be worth up to $500 billion on the open market — leaving the administration liable to generate tens of billions of dollars, even if it sold just 15 percent of the stock in the IPO, according to the Wall Street Journal. However, this public offering and price might be overly optimistic, if not fantastical. 

“The largest IPO in history was Saudi Aramco for $25.6 billion [in 2019], so I think it’s somewhat naive we’ll get to a $75 billion IPO,” said Rossi. The Congressional Research Service reported in July 2020 that Fannie and Freddie had paid dividends to the Treasury totaling more than $301 billion from the start of conservatorship in 2008. 

That there are always bids for housing loans is one of the major selling points Fannie and Freddie can currently make to the investor base, Moody’s Zandi said. Even during COVID-19 in 2020 and 2021, the agencies responded by forbearing foreclosures, allowing borrowers to stop mortgage payments and offering creative solutions to make life easier for borrowers during a once-in-a-century public health crisis.

“They did it right away and that would likely be difficult, if not impossible, if they were released into the private sector,” said Zandi. “They wouldn’t have the same wherewithal to step up.”

Worse yet would be a repeat of 2008, and we’re not just referring to mortgage-backed securities investors fleeing the market due to increased volatility. As conduit shops that package residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS), a privatized Fannie and Freddie would by necessity work closely with investment banks and private equity firms on risky financial machinations with limited quality control, especially in an era of cryptocurrency, online banking and instantaneous capital transfers. 

“Perhaps they’ll introduce more innovative products and turn this thing into the next Countywide,” said Brill, referring to Countrywide Financial, the private mortgage giant whose stock decline and near bankruptcy in 2008 became the first match in the financial crisis. “Mortgage banking is a risky business. If you don’t have the stability of the 10-Year Treasury, then you can get caught on the wrong side of a trade and get wiped out.” 

Matthew Swerdlow, a capital services professional at Ariel Property Advisors, also pointed out that after the IPO, leadership at both agencies will be directed to maximize shareholder value, as that is ultimately the goal of any private company. That could then leave the future of affordable, low-income and workforce housing loans an open question. 

Who wins?

Perhaps the most important question in this entire drama is the simplest one: Who benefits from privatizing the agencies? 

Swerdlow believes that right now the uncertain status and overly broad mission of Fannie and Freddie is the elephant in the room. But once a privatized version decides to pick a certain lane — like market-rate versus affordable loans, or primary markets with 2000s vintages versus tertiary markets with 1990s vintages — then borrowers will become the main beneficiaries. 

“Ultimately, that will lead to more competition. We’re already seeing that competitive set get bigger every day,” Swerdlow said, listing the CMBS markets, banks and private credit as the main alternatives. “Borrowers will now be able to pick from multiple options in the event Fannie and Freddie are just not as aggressive as they were yesterday.” 

But there’s an entirely different sector of the market that stands to benefit by tens of billions of dollars in the event Fannie and Freddie go public this year: shareholders, who bought the agency stock when it was dirt cheap following the 2008 GFC. 

Today, as the Trump administration touts privatization, Fannie Mae stock trades at $10.75 a share, up 1,000 percent from its five-year low of 35 cents in December 2022, back when the Biden administration showed no interest in releasing the entities. The stock may yet go even higher; prior to the GFC meltdown, Fannie Mae stock traded at a high of $81.88 in late 2000, while Freddie Mac reached a high of $73.70 in late 2004. 

“As far as I can tell, the only potential beneficiaries are the private shareholders,” said Moody’s Zandi. “That’s the only player in this drama who stands to benefit.”

And no two shareholders will make out quite so handsomely as Bill Ackman, the founder and chief executive of Pershing Square Capital Management, and John Paulson, the head of Paulson & Co., a family office and investment firm. 

Both American billionaires bought Fannie and Freddie stock (in Ackman’s case, a full 10 percent), for peanuts following the 2008 bailouts, and appear to have captured President Trump’s attention. Paulson was briefly considered by Trump for Treasury secretary, while Ackman is an influential voice who authored a 104-page presentation right before the inauguration. He titled it — not accidentally — “The Art of the Deal” and argued for the merits of privatization. Within two months of taking office, Trump directed Bill Pulte, the head of the Federal Housing Finance Agency, to begin drafting plans to take the entities private. 

“There is no question those two, Ackman and Paulson, are going to make out big time, and it’s no surprise that both have been clamoring for this for years,” said Rossi. “I’d put them at the very top of the heap in terms of who benefits.”

Several analysts cautioned that neither Ackman nor Paulson are alone. Anyone who bought Fannie and Freddie shares at their low, sub-$1 value will make out like a bandit if the entities enter the public markets, as the upside Fannie and Freddie pose in the present day may very well bring their stock prices back up to their early 2000s heights.  

“When you get right down to it, Pauslon and Ackman are investors — they’re engaged in business transactions or deals, and all is fair in business,” said Zandi. “But will this benefit homebuyers and taxpayers? If the answer is no, then the question is ‘Why do it?’” 

Brian Pascus can be reached at bpascus@commercialobserver.com.