the public (re-)privatization of fannie and freddie

If you've been following financial news lately, you've probably heard the growing conversation about Fannie Mae (the Federal National Mortgage Association, or FNMA) and Freddie Mac (the Federal Home Loan Mortgage Corportion, or FHLMC). These industry giants currently guarantee over 70% of all US mortgages and make homeownership possible for millions of Americans. They’re also facing potential privatization—a change with significant implications for the housing market.

In January, Wall Street heavy-weight Bill Ackman made his case for privatization, while newly-appointed Housing and Urban Development (HUD) Secretary Scott Turner named it "a big priority." Here, we explore what the (re)privatization of Fannie Mae and Freddie Mac could mean for the housing market and homebuyers alike.

The role of Fannie and Freddie

Think of Fannie Mae and Freddie Mac as the lubricants that keep America's mortgage engine running smoothly. Without them, our housing finance system would experience significant friction.

When your local bank or mortgage lender originates a home loan, they quickly face a fundamental constraint: limited capital. They can only lend so much before needing to replenish their funds. Fannie and Freddie solve this problem by buying these mortgages, immediately injecting fresh capital back to lenders so they can serve more homebuyers.

Equally important is their guarantee function. When packaging these mortgages into securities for investors, Fannie and Freddie guarantee the timely payment of principal and interest—even if homeowners default. This backing increases the appeal and demand of the securities by reducing risk for investors, which ultimately keeps mortgage rates lower than they otherwise would be.

How did we get here?

Before 2008, Fannie and Freddie occupied an unusual middle ground—publicly-traded companies enjoying implied government backing. This created problematic incentives where they took increasing risks while assuming taxpayers would cover potential losses.

When housing markets collapsed in 2008, this assumption was tested in real-time. Facing insolvency, they received a $187 billion government bailout and were placed under federal conservatorship.

Since then, they've returned to profitability, repaid the bailout with interest, and continued supporting America's mortgage market. However, their current status is without precedent in American finance—an arrangement that was always meant to be temporary and that will eventually require resolution.

What this means for you and the market

The most immediate impact of privatization will be on mortgage rates. Without government backing, lenders face higher funding costs that would almost certainly pass through to borrowers. Most analysts estimate an average rate increase in the range of 0.5-1.0% in the near-term following privatization.

Today's nonconforming loan market provides some insight into these potential changes. While Fannie and Freddie back roughly 70% of all home mortgages, the remaining 30% are nonconforming loans that don't meet their requirements. These nonconforming borrowers typically face higher interest rates, stricter qualification standards, and larger down payment requirements. 

Privatization would also impact mortgage product availability. The 30-year fixed-rate mortgage—a uniquely American product—is highly accessible largely because of the government backing behind Fannie and Freddie, which allows them to better absorb long-term risks. As private entities without this backing, they would have less capacity to support these loans at current levels, likely leading to fewer fixed-rate options and more adjustable-rate products.

It's worth noting that while initial disruptions are likely, the longer-term outlook may be more balanced. Proponents of privatization argue that increased market competition and private capital could lead to innovation and normalize rates. The long-term benefits of a more market-based system may offset the initial adjustments.

Will privatization actually happen?

The federal government has signaled a shift in the outlook for privatization. While previous administrations discussed reform without substantial action, recent statements from key officials signal a more determined approach to resolving the Fannie and Freddie question.

However, substantial challenges remain:

• The sheer magnitude of their $7 trillion portfolio makes privatization logistically complex

• Slim margins in Congress complicate passing comprehensive legislation

• Unanswered questions about how to prevent excessive risk-taking without government oversight remain

Each of these presents a significant obstacle in its own right, and will require careful navigation from all stakeholders. The transition would need to be managed carefully to avoid market disruption, and any reform will carry immediate impacts for homebuyers.

Despite these hurdles, the resolution of Fannie’s and Freddie's statuses remains inevitable—not a question of if, but when.