The High Stakes of Privatizing Fannie Mae and Freddie Mac: Systemic Risks and Housing Affordability in 2025

The debate over the future of Fannie Mae and Freddie Mac has reached a critical juncture. As the Trump administration explores privatization-including potential IPOs-to reduce government involvement in housing finance, the implications for financial stability and public interest demand rigorous scrutiny. While privatization could introduce market efficiencies, the risks of destabilizing the housing market and exacerbating affordability crises are profound. This analysis evaluates the systemic vulnerabilities and equity concerns tied to privatizing these government-sponsored enterprises (GSEs), emphasizing the need for a balanced approach to reform.

Systemic Risks: A Recipe for Recklessness?

Privatizing Fannie Mae and Freddie Mac without robust safeguards risks replicating the conditions that led to the 2008 financial crisis. According to a report by , the removal of the conservative guardrails imposed during the GSEs' conservatorship could incentivize excessive risk-taking, undermining the stability that has kept the housing market afloat for over a decade. The implicit government guarantee currently backing Fannie and Freddie's mortgage-backed securities (MBS) acts as a critical stabilizer. Without it, investors may demand higher yields to compensate for perceived risks, driving up borrowing costs for everyday Americans.

A key concern is the potential collapse of the TBA (To-Be-Announced) market, which facilitates liquidity in mortgage trading. analysis warns that privatization could disrupt this market, leading to a "less liquid and more volatile mortgage market." Such volatility could ripple through the broader financial system, particularly during downturns when the absence of a government backstop might trigger panic.

Moreover, the GSEs' capital shortfall-estimated at $375 billion as of Q2 2025-poses a significant hurdle. Addressing this gap through IPOs or private infusions could take years, during which the housing market remains exposed to uncertainty. Without clear regulatory guardrails on capital reserves, executive pay, and lending practices, the risk of another crisis looms large.

Affordability Implications: A Double-Edged Sword

Privatization's impact on housing affordability is equally contentious. While proponents argue it could spur innovation and competition, the reality may be more complex. policy brief highlights that removing the government guarantee would force Fannie and Freddie to raise guarantee fees (g-fees) to reflect default risks. These costs would likely be passed on to borrowers, disproportionately affecting low-to-middle-income households.

underscores this risk: higher g-fees could increase mortgage rates, tightening credit availability for first-time buyers and exacerbating existing affordability challenges. For context, the U.S. Treasury's $354.9 billion stake in the GSEs further complicates privatization, as restructuring would require congressional action and introduce uncertainty for investors. This uncertainty could destabilize the MBS market, pushing risk into other government-backed programs like Ginnie Mae and increasing taxpayer exposure.

Critically, report notes that a shift away from GSE-backed securities might concentrate risk in programs that lack the scale to serve lower-income borrowers effectively. This could widen the homeownership gap, particularly in underserved communities reliant on affordable mortgage products.

The Path Forward: Balancing Innovation and Stability

The challenge lies in designing a privatization framework that preserves stability while fostering competition. analysis, any reform must include strong regulatory oversight, clear capital requirements, and safeguards against predatory lending practices. For example, maintaining a modified government guarantee-perhaps through a restructured federal charter-could mitigate systemic risks while allowing market-driven efficiencies.

Investors and policymakers must also address the GSEs' capital shortfall proactively. A phased approach to privatization, paired with temporary liquidity tools, could ease the transition and prevent abrupt market shocks. emphasizes, "careful planning is essential to ensure a smooth transition that maintains market stability."

Conclusion

Privatizing Fannie Mae and Freddie Mac is not inherently a bad idea-but it must be done with caution. The systemic risks and affordability implications outlined above underscore the need for a measured, transparent approach. Without it, the U.S. risks repeating the mistakes of the past, leaving millions of Americans vulnerable to rising costs and a potential crisis. For investors, the key takeaway is clear: any reform must prioritize long-term stability and public interest over short-term gains.