With the new Trump administration back in the White House, talk about privatizing Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs) in the United States housing market, has been ongoing.
Background on Fannie Mae and Freddie Mac
Established during the Great Depression, Fannie Mae (Federal National Mortgage Association) was created in 1938 to expand the flow of mortgage money by creating a secondary mortgage market. Freddie Mac (Federal Home Loan Mortgage Corporation) was established in 1970 to support the mortgage market further. Both institutions purchase and securitize mortgages, providing lenders with the capital to issue more loans. They don’t lend money directly to homebuyers but instead work with banks and other lenders. When someone gets a mortgage, Fannie and Freddie buy that loan from the bank. Then, they turn it into something called a “mortgage-backed security,” which they sell to investors. The money they make from selling these securities helps banks keep lending money to new homebuyers.
These companies started out as government-run organizations, but over time, they became private.
Conservatorship
In 2008, the housing market crashed. A lot of risky loans were given to people who couldn’t afford them, and home prices started to drop. When that happened, Fannie Mae and Freddie Mac lost more than $100 billion that year alone. To keep the economy from spiraling further, the government took control of these companies and started helping them get back on their feet.
The government also gave them billions of dollars to stay afloat and made sure they returned profits to taxpayers over time. Since then, they’ve been under government control, which is known as “conservatorship.”
Possible Privatization
The question is: Should Fannie Mae and Freddie Mac stay under government control, or should they return to being private companies? Some say it’s time for them to be privatized.
They argue that these companies have recovered financially and can stand on their own now. On the other hand, some are worried that privatizing them could cause more harm than good.
One of the main worries is that privatization could lead to higher mortgage rates. Right now, the government helps keep mortgage rates lower by backing up Fannie and Freddie. Without that support, private investors would need to make a profit, and that could drive rates up. Some experts believe mortgage rates could go up by as much as 1% if Fannie and Freddie are privatized.
However, some supporters, chief among them Bill Ackman, are pushing for privatization. They argue that it could lower rates in the long run. They believe competition among private companies would help keep rates in check.
Conclusion
Privatization could increase efficiency, reduce federal risk, and enhance competition. However, it raises concerns about reduced access to affordable housing, increased borrowing costs, and market instability.
The last Trump administration started to work on privatization but couldn’t finish the job because they ran out of time. However, they are likely to restart the conversation in the future.
