 "Is privatisation on the cards for mortgage giants Fannie Mae, Freddie Mac? What would it mean for US citizens?")
The US government is weighing an executive order that could set in motion the privatisation of the two government-sponsored enterprises (GSEs) that underpin the vast majority of US home loans.
According to the Wall Street Journal, which cited sources familiar with the matter, President Donald Trump’s administration is considering removing the conservatorship of Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation).
The proposed directive would reportedly instruct federal agencies to assess options for releasing the mortgage finance firms from government control, marking a revival of efforts that stalled during President Trump’s first term.
While the White House has not confirmed the move publicly, officials are said to be considering the economic and political implications of a plan that could have sweeping consequences for the $12tn US mortgage market.
The idea of incorporating Fannie and Freddie into a proposed US sovereign wealth fund has also been floated. Treasury Secretary Bessent indicated last week that government-held stakes in the two firms could potentially form part of the fund’s structure, although no concrete plans have emerged.
Why are Fannie, Freddie important?
Fannie Mae and Freddie Mac do not originate mortgages themselves. Instead, they purchase loans from lenders, package them into securities and guarantee those mortgage-backed securities (MBS) against default. Their operations provide crucial liquidity to the mortgage market and help keep borrowing costs low for American homeowners.
The two entities currently support about 70 per cent of the US mortgage market, according to the National Association of Realtors (NRA), and are widely regarded as pillars of housing finance.
Bill Pulte, Director of the Federal Housing Finance Agency (FHFA), and Treasury Secretary Scott Bessent are understood to be involved in shaping the contours of the proposal.
Impact Shorts
More ShortsWhy the privatisation push?
US-based hedge fund managers and wealthy investors (including some of Trump's strong backers ) are especially insistent on the privatisation.
While Fannie and Freddie have been under federal conservatorship since the 2008 financial crisis, their shares have continued to trade on public markets– largely on speculation that they may eventually be returned to private hands. Shares most recently traded near $5, far below their pre-crisis peaks.
Privatisation could deliver a windfall to those shareholders, many of whom have lobbied aggressively for the firms’ release.
Critics, however, argue that the interests of a few well-positioned investors should not dictate reforms in a system that affects millions of American homebuyers.
How would US citizens be affected?
The most immediate risk is that it could disrupt the mortgage market and lead to an increase in the average rate for a 30-year mortgage, which is currently at 7 per cent. In the United States, a 30-year mortgage is a common form of home loan that features a fixed interest rate for the entire duration of 30 years.
Another concern is the potential harm to the market for mortgage-backed securities, which is largely dominated by Fannie Mae and Freddie Mac. Investors in bonds issued by these companies have long operated under the belief that the federal government would never allow them to fail.
This understanding is known as an implied guarantee and is one reason why Fannie and Freddie bonds typically receive the highest credit ratings.
If they somehow lost that implicit guarantee in the process of privatisation, it might make those bonds less attractive to investors and potentially increase the company’s own borrowing costs, according to New York Times.
That in turn could make homeownership more expensive– something that would be politically unpalatable.
Beyond equity markets, bond investors are also watching closely. Fannie and Freddie’s MBS have long been viewed as near risk-free because of the so-called “implied guarantee” that the federal government would not allow the companies to fail.
If privatisation severs or weakens that assumption, it could lead to higher borrowing costs for the firms, reduce demand for their bonds and, in turn, drive up rates for homebuyers.
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