The Trump Era's Mortgage Gamble: Why Fannie and Freddie's Fate Could Shake Housing Markets—and How to Play It

The Trump administration's 2025 push to end the 16-year conservatorship of Fannie Mae and Freddie Mac has reignited a high-stakes debate over the future of U.S. housing finance. With the White House now leveraging its executive power to rewrite rules for the government-sponsored enterprises (GSEs), investors in mortgage-backed securities (MBS) and housing markets face a pivotal crossroads: Will this policy shift stabilize or destabilize the system? And how should investors position themselves now?

The Policy Pivot: A Government Exit With Strings Attached

President Trump's strategy bypasses Congress, relying instead on regulatory tweaks by the Federal Housing Finance Agency (FHFA) and amendments to the Preferred Stock Purchase Agreement (PSPA). The goal is to exit conservatorship while retaining a 79.9% equity stake in the GSEs via Treasury warrants—a move that keeps the government's thumb firmly on the scale.

But here's the rub: the business model for Fannie and Freddie post-exit remains a black box. Will they pay fees for implicit guarantees? How will guarantee fees (G-fees) be set? And what limits will exist on their portfolios? These unanswered questions create fertile ground for volatility.

The Risks: A Volatile Tightrope

1. Mortgage Rate Shock: If guarantees are phased out, 30-year fixed-rate mortgages—America's financial bedrock—could spike. The Treasury's insistence on maintaining guarantees is a lifeline, but execution is far from certain.

If rates surge beyond 6.5%, MBS valuations could crater, hitting ETFs like MBB and MBG.

1. Political Logjam: Conservatives want to shrink Fannie/Freddie's footprint; the housing industry wants them to stay. The administration's solution—retaining control via equity—may not satisfy either side, leading to regulatory whiplash.

2. Capital Traps: Fannie and Freddie's $334B debt to the Treasury complicates any privatization. Write-offs for investors? Taxpayer bailouts? The answer could upend equity markets.

The Opportunities: Betting on the New Normal

1. MBS Stability Play: If guarantees hold, MBS backed by Fannie/Freddie remain a “safe” bet. Investors could overweight ETFs like MBB or individual agency MBS, especially if rates stabilize.

Rising home prices amid stable rates could boost MBS demand.

1. Equity Timing: A post-conservatorship Fannie/Freddie could see shares surge if the government floats its warrants. Monitor FHFA rule changes and Treasury statements—when the exit begins, institutional investors may rush in.

2. Short-Term Volatility Trading: The policy's uncertainty creates a window to short MBS if rates climb, or go long on construction materials stocks (e.g., LUM, TOL) if demand for affordable housing surges.

The Bottom Line: Act Before the Market Reacts

The Trump administration's maneuvering is a gamble—one that could redefine housing finance for decades. Investors who ignore this shift risk being blindsided. Here's the playbook:

• Now: Overweight agency MBS and track FHFA/Treasury actions.
• Later: If guarantees are confirmed, hold MBS long-term. If not, pivot to shorter-duration bonds or housing stocks insulated from rate hikes.

The clock is ticking. With confirmation hearings for FHFA leadership looming, the next 12 months will decide whether this experiment succeeds—or triggers the next financial tremor.

Act fast. The stakes are as big as the American Dream itself.