The Future of Fannie Mae and Freddie Mac: What You Need to Know

Fannie Mae and Freddie Mac: The Basics

Fannie Mae and Freddie Mac, two giants in the mortgage finance industry, have been under U.S. government control for nearly 17 years. These government-sponsored enterprises (GSEs) play a critical role in the housing market by purchasing and securitizing home loans, ensuring that mortgage lenders have the capital they need to keep lending. As of now, they support about 70% of the mortgage market in the U.S., making them vital to the housing system.

However, there’s growing speculation about whether these entities could be privatized during President Donald Trump’s second term. The idea of releasing Fannie Mae and Freddie Mac from government conservatorship has been floated before, most notably during Trump’s first term, but the complexity of the process and its potential consequences stalled any progress. Now, as the topic resurfaces, experts are warning about the risks it could pose for homebuyers, investors, and the housing market as a whole.

What the Release Could Mean for Homebuyers and Investors

If Fannie Mae and Freddie Mac are released from government control, the impact will largely depend on the level of support the government continues to provide. Andy Winkler, director of housing and infrastructure projects at the Bipartisan Policy Center, suggests that the extent of this support will determine how smoothly the transition goes. However, experts like Susan Wachter, a professor of real estate and finance at The Wharton School of the University of Pennsylvania, caution that “a lot could go wrong” if the process is not handled carefully.

One of the most immediate effects could be higher mortgage rates. Mark Zandi, chief economist at Moody’s Analytics, explains that without the explicit backing of the U.S. government, investors in mortgage-backed securities or Fannie and Freddie’s debt may demand higher interest rates to compensate for the increased risk. This would, in turn, lead to higher borrowing costs for homeowners. While the U.S. housing market has seen an uptick in all-cash home purchases—26% of buyers paid cash in 2024, according to the National Association of Realtors—roughly 74% of buyers still rely on mortgages. Any increase in rates could make homeownership more expensive and less accessible for many Americans.

Why Fannie Mae and Freddie Mac Are Essential

Fannie Mae and Freddie Mac were created by Congress to make homeownership more accessible and to stabilize the housing market. They do this by buying home loans from lenders, which frees up capital for those lenders to issue more loans. The companies then package these loans into mortgage-backed securities, which are sold to investors. This system ensures that lenders have a steady supply of funds to offer mortgages, even in challenging economic conditions.

One of the key innovations these GSEs have supported is the 30-year fixed-rate mortgage, which has become a cornerstone of American homeownership. Without Fannie and Freddie, Winkler argues, “the 30-year fixed-rate mortgage might not exist.” They have also played a crucial role in keeping mortgage rates relatively stable and affordable, especially during times of economic uncertainty.

The Odds of Ending Conservatorship

The possibility of ending Fannie Mae and Freddie Mac’s conservatorship is still very much up in the air. While the Trump administration has not yet explicitly endorsed the idea, HUD Secretary Scott Turner has indicated that it could be a priority. Pershing Square CEO Bill Ackman has also weighed in, suggesting that privatizing the GSEs could generate $300 billion in profits for the government while removing $8 trillion in liabilities from the balance sheet.

However, the process of releasing Fannie and Freddie from government control is anything but simple. It involves multiple stakeholders, including the Treasury Department, the Department of Justice, the Federal Housing Finance Agency (FHFA), and private-sector shareholders. Wachter notes that “it’s not something you can do with one signature on one agreement.” The complexity of the process means that even if the administration prioritizes privatization, it could take years to complete.

The Critique of Privatization

Despite the potential benefits for the government and shareholders, many experts argue that privatizing Fannie Mae and Freddie Mac would be a step in the wrong direction. Zandi, for one, believes that the risks far outweigh the rewards. “It doesn’t make any economic sense,” he says. “A release is a lose-lose for taxpayers, homebuyers, the housing market, the economy—everybody is worse off than the status quo.”

Critics point out that the current system, while imperfect, has provided stability and affordability to the housing market. Privatizing the GSEs could lead to higher mortgage rates, reduced access to credit for lower-income borrowers, and increased risk for investors. They also question the rationale behind privatization, asking, “What problem are we trying to fix?” The housing market is currently functioning well, and tampering with the system could introduce unnecessary risks.

What to Expect Next

As the debate over Fannie Mae and Freddie Mac’s future continues, one thing is clear: the path forward will be fraught with challenges. Whether the Trump administration decides to pursue privatization or maintains the status quo, the implications for homebuyers, investors, and the broader economy will be significant. For now, experts like Zandi and Wachter are urging caution, warning that rushing into privatization without a clear plan could have far-reaching and unintended consequences.

As the housing market remains a cornerstone of the U.S. economy, how Fannie and Freddie evolve will be a story worth watching closely in the months and years to come.