Privatizing Fannie Mae and Freddie Mac: A High-Stakes Gamble for Housing Finance and MBS Markets

The potential privatization of Fannie Mae and Freddie Mac has emerged as one of the most contentious issues in U.S. housing finance. With the Trump administration and the Federal Housing Finance Agency (FHFA) signaling a clear intent to end the GSEs' conservatorship, the market is bracing for a seismic shift in how mortgages are originated, securitized, and priced. While proponents argue that privatization could reduce taxpayer risk and spur innovation, critics warn of a sharp rise in mortgage rates and a contraction in housing affordability. The stakes are high, and the implications for mortgage-backed securities (MBS) markets—and by extension, the broader economy—are profound.

The Case for Privatization: Innovation and Risk Mitigation

Supporters of privatization, including the Trump administration, frame the move as a necessary step to reduce the federal government's role in housing finance. According to a report by CNBC, Fannie Mae and Freddie Mac have repaid the government in full and now hold robust capital buffers, making them attractive to private investorsGSE Privatization—Navigating Complexities and Market Implications^[1]. Proponents argue that removing the implicit government guarantee would force the GSEs to operate more efficiently, potentially leading to innovative mortgage products and improved servicing standardsGSE Privatization A 'Herculean Task': DoubleLine – NMP^[3].

The Congressional Budget Office (CBO) has lent credence to this view, noting that nearly 60% of potential recapitalization scenarios could allow the GSEs to fully repay the Treasury for its stakeCBO report: Fannie and Freddie may have an easier path to privatization^[4]. This financial flexibility, combined with the GSEs' improved credit ratings, suggests that privatization is no longer a theoretical exercise but a plausible path.

The Risks: Higher Rates, Reduced Affordability, and Market Volatility

However, the removal of the government guarantee—a cornerstone of the GSEs' current operations—poses significant risks. As stated by New York Life Investments' Mackay Shields, the implicit guarantee allows Fannie and Freddie to borrow at rates comparable to U.S. Treasuries, effectively treating their securities as risk-freeUS Mortgage Backed Securities Statistics - SIFMA^[2]. Without this guarantee, investors may demand higher yields to compensate for perceived risk, leading to wider spreads and higher mortgage rates.

Data from SIFMA underscores the GSEs' dominance in the MBS market: agency MBS trading averaged $345.1 billion daily in 2025, a 15.9% increase year-over-yearUS Mortgage Backed Securities Statistics - SIFMA^[2]. A loss of confidence in the GSEs could disrupt this liquidity, fragmenting the To-Be-Announced (TBA) market and reducing the efficiency of mortgage securitization. DoubleLine Capital has warned that privatization would be a “herculean task,” with execution risks potentially outweighing benefitsGSE Privatization A 'Herculean Task': DoubleLine – NMP^[3]. The firm argues that higher borrowing costs for the GSEs would likely translate to higher rates for borrowers, undermining affordability for first-time and low-income homebuyersGSE Privatization A 'Herculean Task': DoubleLine – NMP^[3].

Regulatory and Capital Challenges: A Path Forward?

Privatization is not without structural hurdles. The Treasury's liquidation preference in the GSEs has ballooned to $340 billion as of Q3 2024, creating a significant barrier to private capital infusionGSE Privatization—Navigating Complexities and Market Implications^[1]. Additionally, the GSEs' combined net worth remains $181 billion below required regulatory capital, raising questions about their ability to withstand economic shocksGSE Privatization—Navigating Complexities and Market Implications^[1].

A hybrid model—retaining a limited federal guarantee while granting the GSEs more autonomy—has gained traction among some stakeholders, including the Mortgage Bankers AssociationGSE Privatization—Navigating Complexities and Market Implications^[1]. This approach aims to balance market stability with reduced government dependency. However, political dynamics complicate the path forward. The Trump administration's push for privatization must navigate congressional priorities and housing advocates who fear a return to pre-2008-era instability.

Investor Sentiment and the Road Ahead

Market participants remain divided. A JPMorgan Chase survey found that nearly half of MBS investors expect privatization by 2028, while others remain skepticalAmerica's largest mortgage giants may see major change^[5]. The CBO's analysis suggests that the GSEs' improved financial standing has made privatization more feasible, but the process could take years to finalizeCBO report: Fannie and Freddie may have an easier path to privatization^[4].

For now, the MBS market appears resilient. Agency MBS issuance hit $1.19 trillion year-to-date in 2024, reflecting a 21.7% increase compared to 2023CBO report: Fannie and Freddie may have an easier path to privatization^[4]. Yet this stability is predicated on the current structure. Any abrupt shift in the GSEs' status could trigger a reevaluation of risk premiums, with cascading effects on mortgage rates and housing demand.

Conclusion: A Delicate Balancing Act

The privatization of Fannie Mae and Freddie Mac represents a high-stakes gamble. While the potential for innovation and reduced taxpayer risk is compelling, the risks of higher borrowing costs and reduced affordability cannot be ignored. Investors, policymakers, and market participants must grapple with a complex set of trade-offs. The path forward will require careful calibration to preserve liquidity, maintain affordability, and ensure the long-term stability of the housing finance system.