The fate of Freddie Mac and Fannie Mae, two mortgage giants that back a significant portion of America’s mortgage market, is currently under scrutiny as President Donald Trump considers taking them public. The potential deal could bring in billions of dollars for the public purse and boost homeownership, but it also comes with significant risks.
Freddie Mac and Fannie Mae were bailed out by the US Treasury in 2008 during the financial crisis and have been under government conservatorship for the last 17 years. Now, President Trump is eyeing the possibility of selling shares of the two government-sponsored enterprises (GSEs) to private investors. This move could potentially rival the Saudi Aramco IPO as the biggest listing in history, given the GSEs’ combined net worth of almost $161 billion.
However, there are concerns about what this deal could mean for the stability of the financial sector. Selling shares of Freddie Mac and Fannie Mae to private investors, including some of Trump’s billionaire backers, raises questions about the trade-off between the Treasury’s stake and that of private investors. Additionally, there is a risk that this move could drive mortgage rates higher, potentially impacting homeowners and the broader economy.
A group of 14 Democrat senators, led by Elizabeth Warren, has expressed concerns about the potential consequences of taking Freddie Mac and Fannie Mae public. The GSEs currently support about 70% of the US mortgage market, and any significant changes to their structure could have far-reaching effects.
While there are arguments for ending the conservatorship of Freddie Mac and Fannie Mae to open up mortgage borrowing for first-time buyers, experts warn that mishandling this transition could trigger contagion across the financial sector. Losing the government guarantee, currently valued at around $250 billion, could lead to a significant increase in mortgage rates, impacting millions of homeowners.
The administration is aware of these risks, with Treasury Secretary Scott Bessent emphasizing the importance of considering the impact on mortgage rates. President Trump has stated that the US government will maintain its implicit guarantees, but critics argue that an implied guarantee is not sufficient to ensure stability in the housing market.
As discussions continue about the future of Freddie Mac and Fannie Mae, it is essential to carefully consider the potential consequences of any decision. The stakes are high, and the outcome of this deal could have a significant impact on the housing market and the overall economy. The debate surrounding Fannie Mae and Freddie Mac’s future continues to be a hot topic, with potential implications for both investors and taxpayers. The possibility of an explicit guarantee being put in place could lead to higher rates for investors, ultimately resulting in increased costs for homebuyers. However, analysts believe that the risk to taxpayers is minimal, as Freddie and Fannie’s loan portfolios are currently in good standing.
In order to implement an explicit guarantee, Congress would need to pass an act to make it a reality. One potential solution being considered is to maintain the conservatorship of Fannie and Freddie while taking them public. This approach could address the issue of the guarantee but may limit the scope for expanding mortgage lending.
Another important consideration is how the Treasury will handle Fannie and Freddie’s other shareholders. President Trump’s recent social media post on the topic caused a surge in the stock prices of these companies, leading to speculation about potential profits for private shareholders. However, any gains for shareholders would likely come with trade-offs, as the Treasury currently holds senior preferred shares in Fannie and Freddie worth $348 billion.
There are expectations that the Treasury may need to write down some of its claims in order to benefit private shareholders, including prominent Trump allies like Bill Ackman and John Paulson. The outcome of this situation remains uncertain, with potential implications for taxpayers and the broader housing market.
Ultimately, the decision on the future of Fannie Mae and Freddie Mac rests with the president. The potential outcomes range from a beneficial solution for taxpayers and homebuyers to a scenario that could significantly benefit hedge funds and speculators at the expense of taxpayers. As the situation continues to evolve, it remains unclear what direction the president will take in addressing this complex issue.
