America’s homebuyers are facing mounting challenges. Too few homes are being built, construction costs are rising, and insurance is becoming more unaffordable as climate risks grow. But rather than addressing permitting rules, tariffs on building materials, or climate resilience, the Trump Administration has focused its housing agenda on privatizing Fannie Mae and Freddie Mac.
Fannie Mae and Freddie Mac are government-sponsored enterprises that play a central role in America’s housing market. They buy qualifying mortgages from lenders, bundle them into mortgage-backed securities, and sell them to investors. This frees main street lenders to make new loans, keeping credit flowing and rates lower for homebuyers.
But excessive risk-taking by these enterprises helped bring about the 2008 crash and Great Recession, leading them to be placed under federal conservatorship. This arrangement kept the enterprises solvent, transferred governance to the Federal Housing Finance Agency, and set operational guardrails to safeguard the stability of the housing market.
Now, the Trump Administration wants to reprivatize Fannie Mae and Freddie Mac, indicating that an IPO could occur as early as year’s end, yet providing few policy details. This lack of transparency raises concerns that a hasty insider-driven exit from conservatorship will erode the safeguards that have kept the housing market stable, exacerbate systemic risks, and primarily enrich shareholders. Such a move would align with the Administration’s agenda of rolling back financial regulations and oversight. Meanwhile, public pressure from shareholders to privatize and jockeying among investment banks to lead the IPO only heighten concerns that privatization will benefit wealthy investors over the public.
The Trump Administration says privatization will spur innovation and improve housing affordability. But if hastily done and without strong safeguards, it would do the opposite: raise borrowing costs for everyday Americans and encourage the type of risk-taking that fueled the Great Recession.
There is no urgency to re-privatize Fannie Mae and Freddie Mac—they have been operating successfully under conservatorship since 2008. And any eventual release from conservatorship should be deliberate, transparent, and grounded in the public’s interest. Numerous design features would need to be resolved, but two components are absolutely essential: a government backstop for bad times and strong operational guardrails for good times. Together, these “twin pillars” can achieve systemic stability and support mortgage affordability.
These “twin pillars” are tied directly to how the U.S. housing market operates. Investors readily buy Fannie Mae and Freddie Mac’s mortgage-backed securities because they are guaranteed to receive payments, much like an insurance policy. To guarantee that they can make those payments to investors, even when there are defaults on the underlying mortgages, these enterprises in turn charge lenders a guarantee fee, which is mostly passed on to borrowers. And if reserves prove insufficient during a major economic downturn, markets assume the U.S. government will bailout the enterprises, which are widely seen as “too big to fail.”
But this same government backstop—vital especially in downturns—also encourages excessive risk-taking. Pre-recession, this implicit backstop allowed Fannie Mae and Freddie Mac to borrow cheaply, hold onto their mortgage-backed securities instead of selling them, and profit on spreads between homebuyer payments and their own low borrowing costs. That profit motive fueled risky behavior: loosened loan standards, large discretionary holding of securities, and thin reserves. When the 2008 crisis hit, they quickly ran out of money, triggering the government bailout and conservatorship central to the current privatization debate.
Reviving these profit opportunities is a key motivation behind re-privatization efforts. To safeguard against excessive risk-taking and tax payer bailouts, conservatives have long advocated eliminating the government guarantee of a bailout. If that were to happen, Fannie Mae and Freddie Mac would need to charge higher guarantee fees that fully reflect default risks. In theory, any excessively risky actions by these enterprises would result in higher guarantee fees, making their loans less attractive—market discipline in action.
But privatization in this way is dangerous.
For one, this “no pillars” privatization would raise borrowing costs because guarantee fees are passed onto borrowers. Daniel Hornung and Ben Sampson at Stanford estimate that typical borrowers could pay $500 to $2,000 more per year, even in stable economic conditions. The hike in costs would hit credit-worthy lower-income borrowers the hardest.
Second, during a financial crisis, risk-averse investors would pull back funding when it’s needed most. Because housing is deeply tied to the broader economy, a housing credit crunch can spread and deepen a recession. In such times, government backing of mortgages bolsters investor confidence and stabilizes the housing market. That backstop was crucial in 2008, when it helped stabilize the housing market and the broader economy. In fact, the guarantee is so important to systemic stability that investors may not see its removal as credible.
Third, privatization with a government backstop—even if implicit—still risks recreating the conditions that fueled the Great Recession. Any for-profit company that can borrow unlimited amounts of near risk-free debt would do so over time because it would maximize profits. Already, there are proposals to weaken reserve guardrails to boost profitability when re-privatized.
This is why privatization without strong safeguards doesn’t work. A government backstop is essential, but as long as investors expect one, the enterprises will still enjoy below-market borrowing costs and the same incentives for excessive risk-taking. Without sufficient guardrails and oversight, excessive risk taking is not an if but when. These are market failures that cannot be solved by market forces alone.
To be sure, there have been thoughtful proposals that make shareholders absorb losses before taxpayers, which could help curb risky behavior. But investors often ignore long-term risks during good times, and systemic risks only become clear when it’s too late—a lesson of the Great Recession. That’s why strong oversight and strict guardrails on capital reserves, discretionary investments, executive pay, and broader mission are essential. Afterall, these are the very features that have made the conservatorship work.
Taken together, the “twin pillars” of a government backstop and strong oversight and guardrails ensure liquidity and stability. And the resulting funding advantage enables the enterprises to sustain their affordable housing goals. Their below-market borrowing costs effectively subsidize all the loans they guarantee. But by pricing higher-income loans closer to market rates, they generate profits that help expand mortgage access and lower costs for lower-income homebuyers—strengthening economic resilience. These outcomes are possible not in spite of guardrails on profit-taking, but because of them.
While many other issues would also need to be resolved to end the conservatorships, these pillars must be the foundation. Without them, the risks of a second Great Recession are impossible to ignore.
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