During the 2008 financial crisis, millions of Americans lost their homes, leaving consumers and lenders in financial ruin. The crisis was primarily caused by lax mortgage lending practices at banks that approved consumers for loans they couldn’t afford.
Regulatory agencies reevaluated the financial system to avoid a future catastrophic financial breakdown. The Dodd-Frank Act was enacted to curb risky banking practices and protect consumers and taxpayers.
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In the aftermath of the housing market bubble, the federal government placed Fannie Mae and Freddie Mac under a financial conservatorship to help the housing market recover.
Some outspoken analysts have suggested that it could be time to release Fannie Mae and Freddie Mac from this financial arrangement, but others argue the housing market is still too tenuous for such a change.
Prominent hedge fund manager Bill Ackman recently suggested that there is tremendous upside to taking these agencies private; housing experts argue such a change could increase mortgage rates further in an already volatile market.
NEW YORK, NY – JUNE 17: Bill Ackman speaks at The 2024 Pershing Square Foundation Prize Dinner at the Park Avenue Armory. Ackman is a big proponent of taking Fannie Mae and Freddie Mac private, but it could negatively affect mortgage rates.
The upside of ending the Fannie Mae and Freddie Mac conservatorships
Outspoken investor activist Bill Ackman has suggested that President-elect Donald Trump could end the financial conservatorship of Fannie Mae and Freddie Mac, both of which are known as government-sponsored enterprises (GSE).
While this change likely wouldn’t be possible until 2026, experts are considering the possibility that Trump could privatize these housing agencies following 15 years of government oversight.
Ackman — and other private shareholders of Fannie Mae and Freddie Mac — could stand to gain $1 billion in investment gains if the agencies were privatized. Indeed, shares for both agencies soared when Ackman posted his take on X (formerly Twitter) on December 30th.
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However, Pershing Square Capital, Ackman’s investment firm, has a substantial holding in both Fannie Mae and Freddie Mac. While this has prompted some to question the motivation of privatizing federally monitored housing agencies, it has also elevated the conversation about their future on the national stage.
Ackman estimates that ending the conservatorships would generate an additional $300 million in revenue for the federal government while removing $8 trillion in liabilities from its balance sheet.
Trump had previously attempted to privatize Fannie Mae during his presidential term and may try again during his second term, depending on how the housing market progresses. If successful, there could be major implications for mortgage rates and home buyers.
Privatization could hurt mortgage rates
In 1998, mortgage debt was 61% of the U.S. GDP, but by 2006, it had risen to 98%. The skyrocketing share of housing debt was an indicator that the average mortgage principal was rising substantially, paving the way for the 2007-2008 housing crisis.
The Federal Reserve Bank estimates that 3.9 million Americans lost their homes to foreclosure between 2007 and 2010 as a direct result of the housing bubble.
When Fannie Mae and Freddie Mac were placed under financial conservatorship, the goal was to get the agencies in better financial standing and have more oversight of their operations to protect consumers in the housing market.
Related: Fed chair Jerome Powell issues warning on inflation, weak housing market
If the Fannie Mae and Freddie Mac conservatorships were to end in 2026 or 2027 — as some have speculated — it could have surprising implications for mortgage rates.
Danielle Hale, Chief Economist at Realtor.com, highlights that privatizing these agencies would likely further raise mortgage rates, breaking Trump’s housing campaign promises.
“Mortgage rates would likely move higher because right now, under conservatorship, there is a government guarantee that if Fannie and Freddie were to get into any trouble, they would be bailed out by the government, and thus investors would be bailed out,” she explained. “Which means consumers currently get lower mortgage rates, because investors are willing to lend without demanding as much of a risk premium.”
On the campaign trail, Trump vowed to bring unmanageable mortgage rates down to 3%, levels not seen since 2022. However, privatizing these agencies would make mortgage lending riskier and, therefore, more expensive, as consumers would bear more of the risk burden.
Related: Veteran fund manager issues stark S&P 500 warning for 2025
