Fannie Mae (1938) and Freddie Mac (1970) were created with the end goal of promoting homeownership across the United States. Fannie Mae and Freddie Mac, both government-sponsored entities (“GSEs”), are publicly traded and have historically operated like any independent public entity. Their main business is buying whole mortgages from originators and then bundling those mortgages into mortgage-backed securities that they guarantee and sell on the secondary market.
The 2007 financial crisis made raising capital very difficult for the two GSEs, and they became unable to borrow against their securities to acquire enough cash in the buy-back market. In 2008, the GSEs were bailed out by the government and put under its conservatorship. The White House attempted to privatize the two GSEs during President Donald Trump’s first term, but the efforts were unsuccessful due to the complexity of the process.
The new head of the Federal Housing Finance Agency is ousting board members at the GSEs, while discussing the privatization of Fannie Mae and Freddie Mac with the goal of transferring the ownership of the GSEs from the Treasury Department to a sovereign wealth fund proposed by President Trump. The potential creation of the sovereign wealth fund was announced by President Trump in February but has not come to fruition yet. Over the past few weeks, President Trump has continued to publicize his desire to release the GSEs from governmental control, while retaining the implicit federal guarantee to avoid destabilizing the mortgage market.
Positive Impacts of Privatization
- Decrease federal liabilities: Once privatized, the GSEs would no longer be part of the liabilities on the federal government’s balance sheet, which means they would not represent a burden on taxpayers who currently backstop the GSEs in case of financial trouble.
- Market efficiency and innovation: A more efficient distribution of resources, better pricing models and potentially reduced costs over the long term could all be results of the privatization of the GSEs. Private control could allow the GSEs to explore new, creative mortgage structures to meet evolving consumer needs, away from government oversight. Private investors could lead to the development of new products and new homeownership opportunities.
- Increased profitability for shareholders: Private shareholders could benefit significantly from privatization. While they could only expect limited returns under conservatorship, privatization could unlock the value of the GSEs, benefiting them and bolstering confidence in the housing market.
Negative Impacts of Privatization
- Higher mortgage rates and less affordable housing: Privatization of the GSEs means they would operate like private companies. As a result, mortgage rates will likely increase as private companies need to generate returns for their shareholders. Furthermore, borrowing costs for multifamily housing will likely increase, threatening new affordable housing projects and limiting the availability of affordable rental housing.
- Economic risks: Some opponents fear privatization could lead to economic risks similar to the ones that led to the 2008 financial crisis. Also, private lenders take more risks during boom times and may offer borrowers loan products they won’t fully understand.
President Trump has indicated that even if the GSEs are privatized, the government would likely retain its implicit guarantee to backstop the GSEs. The implicit guarantee is the widely held belief that the U.S. government will bail the GSEs out before they could default from financial difficulties (even though there is no explicit guarantee in law). The maintenance of the implicit guarantee is likely a critical component to any privatization plan, as removing the GSEs from conservatorship has the potential to destabilize the mortgage market. The Mortgage Bankers Association is among a group of industry groups pushing for an explicit guarantee from the U.S. government that it would bail out the GSEs before they could default.
