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This week, President Trump made a long-awaited announcement concerning the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). On Tuesday, Trump wrote in a Truth Social post: “I am working on TAKING THESE AMAZING COMPANIES PUBLIC, but I want to be clear, the U.S. Government will keep its implicit GUARANTEES, and I will stay strong in my position on overseeing them as President.” While part of his proposal is sound—these two government-sponsored enterprises (GSEs) should indeed be removed from Federal Housing Finance Authority (FHFA) conservatorship—the implicit government backing of the GSEs must be removed, too.
The GSEs have been under FHFA conservatorship since September 2008, when their bankruptcy quickly precipitated a wider financial crisis. They remain a singular force in housing finance. Fannie and Freddie currently hold more than $7 trillion in mortgages. Most of these mortgages have funded purchases of single-family residential property and account for about half of all such finance. The GSEs also provide about one-third of multifamily mortgage finance.
Privatization is an enormous opportunity that is also freighted with risks. To begin a conversation about privatizing Fannie and Freddie is to suggest that they have returned to health, as well as to contemplate the largest public equity offering in history. But Fannie and Freddie remain fragile, and small changes in the structure of a privatization deal can put hundreds of billions of dollars at risk. Poor execution can leave taxpayers exposed to future bankruptcies and reverberate through mortgage finance and capital markets in unexpected ways. It is worth taking the time to get the details right.
Americans’ attachment to the GSEs rests on the desire for cheap mortgage finance. The GSEs are widely credited with making 30-year, fixed-rate, prepayable mortgages widely available at low cost. This is not the norm internationally, where floating interest rates, shorter maturities, and prepayment penalties are more common features. The GSE mortgage structure reduces monthly payments and transfers interest rate risk from borrowers to lenders.
Big advantages
Private mortgage providers have firmly embraced the GSEs’ mortgage structure and provide finance at a comparable price. The difference in interest rates between privately underwritten “jumbo” mortgages which are too big for the GSEs and otherwise identical ‘conforming’ GSE mortgages has averaged a mere 6 basis points (0.06 percent) over the past five years, albeit with swings of 60-70 basis points in either direction. Thus, it is not obvious that the continued existence or pricing of 30-year fixed-rate mortgages depends on the GSEs.
Since 1992, the FHFA has been required to establish annual housing goals for the GSEs. These goals tend to set thresholds for mortgage availability using equity-based criteria like geography and household income. Borrowers who cannot otherwise satisfy the GSEs’ underwriting criteria may qualify for mortgages through these programs. Yet it is not clear that these programs provide more benefits than other government housing programs or private banks’ Community Reinvestment Act activities.
Nevertheless, the GSEs enjoy significant legal and regulatory advantages over the regulated financial system. The GSEs are neither chartered as banks nor required to meet bank prudential standards. Their required capital is far less than that required for bank balance sheet lending or private securitizations. They raise debt on favorable terms due to their proximity to the government. Trillions of dollars in agency debt and mortgage-backed securities (MBS) are held by the Federal Reserve and the banking system, where regulations deem them far less risky than comparable debt obligations. This combination of light-touch regulation, leverage, and cheap finance allowed the GSEs to quickly devour much of the residential mortgage market from the 1980s through 2008.
When the GSEs failed in September 2008, it became clear that they had raised finance cheaply not because they were superior managers of risk, but because investors correctly anticipated that the United States Treasury would backstop them in a crisis. The Treasury committed hundreds of billions in capital to the GSEs, receiving senior preferred stock and warrants to purchase 79.9% of their common stock. Exercising those warrants gave the Treasury majority ownership and control of the GSEs, which was used to sweep all GSE profits into the Treasury.
The GSEs have returned to profitability, but their finances remain precarious. At the end of 2024, Fannie was operating at 46x leverage, while Freddie stood at 57x (the largest banks are effectively capped at 20x). To reduce their leverage to reasonable levels, the GSEs must more than double their equity, which will take about a decade at their current rate of profitability.
Bill Ackman
Bill Ackman’s Pershing Square holds 2% of Fannie Mae’s equity and has a plan for privatizing the GSEs that is well-calibrated to our current political moment. In Ackman’s “The Art of the Deal” presentation from earlier this year, Obama and Biden are the villains, stealing the GSEs and their profits, while Trump is the hero who can save them.
Ackman’s plan pays lip service to curtailing the benefits enjoyed by the GSEs, but the details of his plan leave most of them untouched. He wants the GSEs to remain outside the sphere of bank regulation and free to employ immense leverage. He likes the privileges GSE securities enjoy at the Fed and on bank balance sheets. He would like to formalize a government backstop of the GSEs as a kind of reinsurance arrangement, but these crucial details are left to the imagination.
Ackman is keen to have Trump 2.0 achieve privatization by executive action. But because the statutes enabling the GSEs’ role in housing policy cannot be canceled by the executive, executive action would leave the GSEs’ role in future housing policy unresolved. The need for legislation on this question requires reading Congress in on any privatization plans. It would be foolish for the Treasury to give away the GSEs’ profits while retaining the tail risk.
There is no reason why the GSEs cannot compete alongside other mortgage-backed securities issuers as private entities. However, it would be reckless to privatize the GSEs with a full complement of government-subsidized advantages in prudential regulation, funding terms, and catastrophe insurance. The GSEs should compete and survive on the same terms as other regulated financial firms.
No fire-sale prices
To bring them within the perimeter of prudential regulation, the GSEs should be rechartered as Financial Holding Companies and designated systemically important institutions, subjecting them to the supervision and regulation of the Federal Reserve. The GSEs would be expected to maintain adequate levels of capital and manage risks according to best practices. Why should they be exempt?
The GSEs must also give up their funding advantages. The Federal Reserve should treat agency debt and agency MBS like their private sector counterparts by selling the agency obligations in its portfolio and refraining from future purchases. Bank capital regulations should similarly apply credit risk weights to agency obligations without prejudice.
Privatized GSEs should not be available to the government as instruments of policy. The divorce is necessary to blunt the GSEs’ claim on public assistance in future crises. Giving up the GSEs does not require giving up on housing policy, which is also pursued through multiple other agencies. An act of Congress terminating the GSEs’ place in housing policy is essential.
Preparing the GSEs properly for privatization will take several years to solidify their finances, rebalance their footprint in the regulated financial system, and decouple their obligations from the Fed’s balance sheet. When preparations are complete, selling hundreds of billions in GSE equity will require years of steady execution. The impossibility of any investor achieving a controlling stake makes it even more important to establish robust corporate governance, processes, and controls prior to a public offering.
Competently-run, -regulated, and -privatized GSEs will be profitable, but also much smaller than they were in 2008. Privatizing rechartered, re-regulated GSEs will raise significant funds for the government, reduce risks to future budgets, and allow the rest of the financial system to compete on a level playing field. There is no economic reason why the Trump administration should fast-track a privatization process, and Congress should not allow the GSEs or other valuable government assets to be dumped at fire-sale prices for short-term political advantage.
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Matt Sekerke, Steve H. Hanke
