“Economists have warned that reprivatizing the enterprises could have disastrous effects on the mortgage market, driving up costs for homebuyers even further,” the senators wrote. “For example, some experts have estimated that mortgage rates could increase by up to 1% in the first year of privatization alone.”
The main issue is that it is unclear exactly how Fannie and Freddie would be privatized. Unsettled questions include: Are Fannie Mae and Freddie Mac going to be relisted on the stock market? Are they still going to be rescued should they fail — meaning, will the government give the financial markets a guarantee should that happen? Will investors believe that the government will save them if they fail? Will Congress come up with a plan to provide an explicit guarantee to the two companies, which themselves guarantee trillions of dollars in mortgages?
“There are a lot of questions here,” Jim Parrott, a housing-finance analyst, told MarketWatch. Parrott was an economic advisor in President Barack Obama’s administration.
In response to MarketWatch, White House spokesperson Harrison Fields said that the Trump administration is “committed to strengthening the Federal Housing Finance Agency (FHFA) to advance the president’s mission of restoring the dream of homeownership for all Americans.”
He added that “any actions under consideration will be carefully evaluated in a safe and sound manner.”
Depending on how the government proceeds, the average home buyer could be impacted. Here’s how.
Depending on what path the Trump administration takes, there are several factors that would determine whether mortgage rates would go up as a result, Parrott said.
Mortgage rates are already high and have been a barrier to many people’s plans to buy a home. The 30-year fixed-rate mortgage averaged 6.95% as of June 9, according to Mortgage News Daily, and has remained close to 7% over the past few years. On the same date five years earlier, when Trump was last president, the average 30-year rate was 3.09%.
One key variable is whether the financial markets expect the federal government to rescue Fannie and Freddie if they collapse again. Investors are worried about the “extent and depth of the government’s guarantee,” Parrott said, and that could impact how they view mortgage-backed securities that Fannie and Freddie create.
If investors feel uncertain about the guarantee, they could demand a higher risk premium on such securities, and if they do that, that could flow to the average borrower in the form of higher mortgage rates, he explained.
“While both [government-sponsored enterprises] are now better capitalized and highly profitable, any release without clear terms around a government guarantee could drive up mortgage rates and destabilize the housing market,” said Alanna McCargo, former president of Ginnie Mae, which like Fannie and Freddie, also backs mortgages.
Ginne Mae backs mortgages insured by the Federal Housing Administration, the U.S. Department of Veterans Affairs and the U.S. Department of Agriculture. Fannie and Freddie back conventional mortgages.
Mat Ishbia, president and chief executive of United Wholesale Mortgage UWMC, one of the country’s biggest mortgage lenders, said he shares that sentiment, broadly speaking. “Rates going up would be tied to the implicit versus explicit backing of the federal government,” Ishbia told MarketWatch. “This could cause interest rates to rise, which we hope doesn’t happen.”
Trump has tried to reassure the market that the government could provide an “implicit guarantee” to bail out the companies if needed. That could assuage some fears among investors, Parrott said, but there is no certainty that future presidents would do the same.
Trump “can’t give them any assurance that the next president would make the same decision,” Parrott continued, “so until Congress weighs in with an explicit guarantee, there will always be this little bit of uncertainty for investors.”
Borrowers with lower credit scores could also see higher mortgage rates than they do today, Parrott said. The current housing-finance system is set up to charge lower-risk borrowers more and higher-risk borrowers less, to increase the number of people who can afford a mortgage.
The principal beneficiaries of this cross-subsidy have been home buyers with “modest incomes,” those who have lower credit scores and those with higher loan-to-value ratios, meaning those whose down payments are smaller, according to a report by the Urban Institute, a nonpartisan think tank.
“They keep mortgage rates lower than they would otherwise be for [borrowers with] somewhat higher credit risk,” Parrott said.
If the Trump administration pushes for “more risk-based pricing … [and] they’re not providing that cross subsidy, then you would see those with higher credit risk seeing their mortgage rates go up even further,” he said.
The wrinkle in this issue is that the Trump administration wants lower mortgage rates. The mortgage industry and real-estate agents also want lower rates, because home sales have stalled. Housing affordability has worsened significantly over the past few years as home buyers have been priced out by high interest rates and record-high home prices.
For that reason, the administration may not even proceed with the privatization plan, UWM’s Ishbia said.
“If rates go up because of this change, or this change happens and rates go up, that would be bad for everyone,” Ishbia said in a video last week.
Ishbia praised actions that Federal Housing Finance Administrator Bill Pulte has taken at Fannie and Freddie recently, and suggested the enterprises could remain under conservatorship. “Fannie Mae and Freddie Mac acting more private, but still being in conservatorship might be the best of both worlds,” he said in the video. “We’ll see what happens, but … if rates go up because of it, that’s a negative, and I don’t think that’s going to happen.”
The Trump administration has acknowledged concerns about privatization potentially pushing up mortgage rates. In a May interview with Bloomberg, Treasury Secretary Scott Bessent said the Treasury Department is “doing a great deal of studying” of privatizing the GSEs, “because the one requirement… for this privatization is that they are privatized in such a way that mortgage spreads — they do not widen,” Bessent said, referring to the difference between the 30-year fixed-rate mortgage and the 10-year Treasury rate.
One other outcome of the privatization of Fannie Mae and Freddie Mac could be higher fees for mortgage lenders, which could then get baked into mortgage rates, Parrott said.
If the Trump administration wants Fannie and Freddie to earn a higher return — either to make it easier to bring them out of conservatorship or to make more money for the government — one way to do that would be to increase fees charged to lenders.
Fannie and Freddie guarantee the payment of principal and interest on the mortgage-backed securities and they also charge lenders a fee for that. And that in turn could be passed on to the average borrower in the form of higher mortgage rates, Parrott said.
But if the two entities remain under the government’s control, it’s unclear whether Fannie and Freddie will charge higher so-called guarantee fees, or g-fees, or keep them at their current levels.
Ultimately, the question of whether to bring Fannie and Freddie out of conservatorship isn’t controversial. “The current administration is right to reopen this conversation after 17 years of conservatorship,” McCargo, the former Biden official, said.
If Fannie Mae and Freddie Mac start acting like private companies, people may see “more products, more options and more affordability across the board,” UWM’s Isbhia said, “which is a win for consumers.”
But how the government handles the process is important, McCargo added. “I think both the Treasury secretary and the FHFA director understand the stakes and the importance of pursuing any reform in a way that safeguards the housing market — an essential sector of the economy that makes up nearly 18% of U.S. GDP,” McCargo said. “This is a big deal and must be approached with caution, careful deliberation, and purpose.”
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