By: Caroline Nagy
The Trump administration has called for the recapitalization and return to private control of Fannie Mae and Freddie Mac, which provide critical support for the mortgage market. The two have been under federal conservatorship since their ignominious near-collapse in 2008. Untangling the conservancy and moving Fannie and Freddie back under private shareholder control would prove an extremely complicated, highly risky endeavor that would provide a massive windfall to key Trump campaign donors while increasing the cost of housing for everyone else.
Also known as Government-Sponsored Enterprises, or GSEs, Fannie and Freddie play a massive role in the U.S. housing finance system: together, they back about half of the roughly $16 trillion in outstanding U.S. mortgage debt. This takes loans for single-family homes and apartment buildings off lenders’ books and frees up more money for them to lend. Fannie and Freddie then pool the mortgages they hold into mortgage-backed securities and sell them to investors, which is their main revenue source, in addition to profits from their own investments. The GSEs maintain lending standards for the types of mortgages they will purchase and charge lenders guarantee fees for taking on the risk that a mortgage will default.
Currently, the GSEs are under the conservatorship of the Federal Housing Finance Agency (FHFA), where they effectively receive government backing for their securities and are not bound by any fiduciary duty to maximize profits for shareholders. Releasing the GSEs from conservatorship would be a terrible deal for the U.S. public. Here’s why Fannie and Freddie should stay exactly where they are:
- Privatization will harm the GSEs’ public mission and risk financial instability
Releasing the GSEs from conservatorship would effectively re-privatize them by turning their governance over to their boards of directors and shareholders, which would oblige them to maximize shareholder returns over their public mission to support broader access to mortgages. It is unclear how the GSEs would balance their duty to maximize returns with their obligation to fulfil their public purposes, including Congressionally-required affordable housing goals and a duty to serve underserved mortgage markets. However, their failure to appropriately balance their pursuit of profits with their duty to promote a safe and stable housing finance system in the leadup to the 2008 foreclosure crisis should leave the U.S. public highly wary of how they will behave once returned to shareholder control.
Prior to the 2008 financial crisis, Fannie and Freddie aggressively lobbied to undermine any effective regulation, and took excessive risks in search of profit while failing to maintain adequate capital reserves to absorb any losses. Ultimately, this pattern of recklessness and indifference to their public responsibilities resulted in their overexposure to toxic subprime mortgages and their severe undercapitalization. They both teetered on the verge of collapse once home values declined and mortgage defaults surged during the subprime mortgage crash. The Bush administration acted swiftly to bail out the GSEs with taxpayer’s money, for a combined total of $181 billion, as their failure would have been catastrophic to the U.S. and global economy.
- Privatization will make housing more expensive
U.S. renters struggle with record-high housing costs and young people are increasingly shut out of homeownership altogether. This year, the median age of first-time homebuyers hit 38, up from 35 in 2023 and just 29 in the 1980s. In our time of unprecedented housing unaffordability, we need a housing finance system that prioritizes the needs of U.S. families, not private investors. However, reprivatizing Fannie and Freddie would actually worsen the housing affordability crisis and make housing more expensive.
The loss of the federal backstop will raise housing costs. Today, GSE securities are effectively backed by the U.S. Treasury, which makes them highly attractive to investors. However, privatization would end this backstop, which means that investors would perceive these securities as bearing higher risk and will demand higher returns on Fannie and Freddie’s securities. This would raise mortgage rates for consumers both in the short-term and long-term. Higher mortgage rates would drive even more homebuyers out of the market, would make it harder for homeowners to get refinance loans, and raise costs for multifamily housing operators, who will pass the higher costs of lending on to their tenants in the form of higher rents.
Additionally, the GSEs would need to raise $375 billion to get out from under their FHFA conservatorship.That is more than double their $166 billion currently on hand, forcing Fannie and Freddie to increase rates to cover this capital shortfall.The loss of the government backstop and the requirement to restore the GSEs’ capital reserves would drive up the cost of borrowing and tighten lending standards, making mortgages and refinance loans more expensive and difficult to obtain, particularly for homebuyers with lower credit scores or those who have less than a 20 percent downpayment.
- Privatization will increase mortgage market volatility
Fannie Mae was created in 1938 in response to the Great Depression, which brought mortgage lending to a virtual standstill after countless families lost their homes to foreclosure. The government-backed public stabilized the housing finance system by guaranteeing loans and promoting market liquidity. But this public mission was not broad and it was deeply racist. It excluded people of color and immigrants, it instituted the redlined maps that excluded communities of color, and this racial discrimination was enforced by whites-only resale covenants that excluded non-white families.
Even today, having a government backstop provides an important countercyclical function during economic downturns, attracting investors seeking safe bets while keeping mortgage lending afloat, just as Fannie allowed home lending to recover from the Great Depression. But, the fully-privatized GSEs were unable to provide such a function during the 2008 financial crisis. Instead, they fell prey to the same market pressures that brought down mortgage lenders like Countrywide and banks that like Wachovia. If we re-privatize the GSEs, we can expect a significantly more volatile U.S. mortgage market that is more subject to the booms and busts of investment capital, which will make it much more difficult to obtain a mortgage during downturns.
- Privatization will benefit a handful of hedge fund billionaires at everyone else’s expense
Despite being under conservatorship, the GSEs remain publicly-traded corporations, with the U.S. Treasury as their main shareholder. Following Fannie and Freddie’s 2008 collapse, vulture investors like Trump donor and hedge fund billionaire Bill Ackman swooped in. Ackman bought one-tenth of Fannie and Freddie stock at bargain basement prices, anticipating future profits; other prominent Trump-supporting hedge fund billionaires sitting on shares include John Paulson and Bruce Berkowitz. These kinds of Wall Street barons will likely buy up the rest of Fannie and Freddie and turn it to their own investment purposes, shedding their important public missions to support housing affordability for everyone.
GSE privatization is a terrible deal for the rest of us:
While the upside for investors like Bill Ackman is clear, a Trump-led release of Fannie and Freddie would represent a terrible deal for the public, who would cede control to shareholders while receiving higher housing costs as our absurd reward. In the midst of an unprecedented cost-of-living crisis and rising economic uncertainty, GSE privatization would increase housing costs both for homebuyers and renters. This would be reckless and indifferent to the suffering of renters and homebuyers struggling with record housing unaffordability. And it puts the stability of our entire housing finance system — and the broader economy — at risk for the benefit of a small class of wealthy investors.
The post 2008 crisis period has been the longest period of time that Fannie and Freddie have operated without a major public scandal. And, lest we forget, Fannie and Freddie nearly took the entire global economy down with them the last time they were allowed to operate freely. Taking Fannie and Freddie out of conservatorship doesn’t require them to be sold to Wall Street predators: the public should be the majority shareholder. Why fix what isn’t broken?