The Political and Economic Risks of Fannie Mae and Freddie Mac Reprivatization: Assessing the Impact on Mortgage Rates and Housing Market Stability

The reprivatization of Fannie Mae and Freddie Mac (F&F), two government-sponsored enterprises (GSEs) central to the U.S. housing finance system, has reignited debates about its implications for mortgage rates and housing stability. While proponents argue that privatization could reduce federal liabilities and foster market innovation, critics warn of systemic risks, including higher borrowing costs and reduced access to affordable housing. This article examines the political and economic challenges of reprivatization, focusing on its potential to disrupt mortgage markets and exacerbate affordability crises.

Political Challenges: Navigating Regulatory and Legislative Hurdles

The Trump administration’s push to privatize F&F through an initial public offering (IPO) or hybrid model faces significant political and regulatory obstacles. The GSEs, which have operated under a government conservatorship since the 2008 financial crisis, require congressional approval to exit this arrangement. A key hurdle is the U.S. Treasury’s $340 billion stake in the GSEs, which includes senior preferred shares with a liquidation preference that complicates privatization [1]. Resolving this stake could involve converting preferred shares to common equity, forgiving part of the obligation, or retaining Treasury’s ownership for future profits—each option requiring legislative action [1].

Additionally, F&F must address a combined regulatory capital shortfall of $181 billion as of September 2024, per the Enterprise Regulatory Capital Framework (ERCF). Meeting these requirements could take years of retained earnings or require private capital infusions, such as an IPO [3]. The Federal Housing Finance Agency (FHFA), which oversees the GSEs, has emphasized the need for stability, with Director Bill Pulte cautioning against abrupt changes that could destabilize the housing market [1].

Economic Risks: Mortgage Rates and Housing Affordability

The removal of the implicit government guarantee—a key factor in keeping mortgage-backed securities (MBS) attractive to investors—poses a critical economic risk. Without this guarantee, investors may demand higher yields to compensate for perceived credit risk, potentially raising mortgage rates by 0.5 to 1 percentage point [2]. Such an increase could reduce homebuyer demand by 15-20%, disproportionately affecting first-time and lower-income buyers who rely on affordable financing [4].

The ripple effects extend beyond single-family housing. The multifamily rental market, which depends on GSE financing for affordable housing projects, could face reduced lending to less profitable segments, straining supply and driving up rents [3]. For example, F&F currently provide 40% of multifamily financing, including critical support for workforce housing [6]. A shift toward profit-driven models might prioritize high-yield projects over affordable housing, exacerbating rental affordability issues [6].

Moreover, the TBA (To-Be-Announced) market—a cornerstone of mortgage liquidity—could fragment if F&F operate as separate entities post-privatization. This fragmentation might reduce market depth and increase volatility, further destabilizing the housing finance system [3].

Balancing Innovation and Stability

Proponents of privatization argue that it could unlock equity value for shareholders and introduce competition, fostering innovation in mortgage products [6]. However, these benefits depend on a carefully structured transition that preserves mission-driven goals, such as affordable housing mandates. Without robust regulatory frameworks, smaller lenders and underserved communities may face tighter credit standards and reduced access to financing [5].

The political landscape remains divided. While Senate Banking Committee Chair Tim Scott supports a phased transition, Senator Elizabeth Warren warns of affordability risks. Treasury Secretary Scott Bessent, who holds critical financial claims on the GSEs, will play a pivotal role in negotiations [1]. Meanwhile, institutional investors like Bill Ackman’s Pershing Square advocate for privatization to unlock equity value [1].

Conclusion: A Delicate Transition

Reprivatizing F&F is a complex endeavor that requires balancing market efficiency with systemic stability. While privatization could reduce taxpayer risk and promote innovation, the potential for higher mortgage rates, reduced affordability, and market fragmentation cannot be ignored. Policymakers must prioritize safeguards to ensure that the transition preserves access to credit for underserved communities and maintains housing market stability.

As the debate unfolds, investors and stakeholders must monitor legislative developments and regulatory actions closely. The path forward will likely hinge on whether the administration and Congress can craft a framework that mitigates risks while fostering a resilient housing finance system.

Source:
[1] The Prospects of Privatization for Fannie Mae and Freddie Mac [https://fticommunications.com/the-prospects-of-privatization-for-fannie-mae-and-freddie-mac-in-2025/]
[2] Fannie Mae and Freddie Mac privatization: What it means [https://www.usatoday.com/story/money/2025/06/24/fannie-mae-freddie-mac-privatization/84342221007/]
[3] GSE Privatization—Navigating Complexities and Market Implications [https://www.newyorklifeinvestments.com/mackay-shields/insights/navigating-complexities-and-market-implications]
[4] The Privatization of Fannie Mae and Freddie Mac [https://www.ainvest.com/news/privatization-fannie-mae-freddie-mac-navigating-risks-opportunities-shifting-housing-market-2508/]
[5] The Implications of Publicizing Fannie Mae and Freddie Mac on the Mortgage Industry [https://capitollien.com/the-implications-of-publicizing-fannie-mae-and-freddie-mac-on-the-mortgage-industry/]
[6] Trump's GSE reform plan back on the table [https://yieldpro.com/2025/05/trumps-gse-reform-plan-could-reshape-multifamily-financing-landscape/]