During the 2008 financial crisis, millions of Americans lost their homes, leaving consumers and lenders in financial ruin. The crisis was caused primarily by lax mortgage lending practices at banks that approved consumers for loans they could not repay.
Regulatory agencies reevaluated the financial system to avoid a future catastrophic financial crisis. The Dodd-Frank Act was enacted to curb risky banking practices and protect consumers and taxpayers.
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In the wake of the housing market bubble, the federal government placed Fannie Mae and Freddie Mac under financial conservatorship to help the housing market recover.
Some outspoken analysts have suggested that it might be time to release Fannie Mae and Freddie Mac from this financial arrangement, but others maintain that the housing market is still too fragile for such a change.
Prominent hedge fund manager Bill Ackman recently suggested that privatizing these agencies has enormous advantages; Housing experts argue that such a change could further increase mortgage rates in an already volatile market.
The Advantages of Ending Fannie Mae and Freddie Mac Conservatorships
Outspoken investor activist Bill Ackman has suggested that President-elect Donald Trump could end financial conservatorship of Fannie Mae and Freddie Mac, both known as government-sponsored enterprises (GSEs).
While this change probably won't be possible until 2026, experts are considering the possibility that Trump could privatize these housing agencies after 15 years of government oversight.
Ackman (and other private shareholders of Fannie Mae and Freddie Mac) could accept earn billion dollars in investment profits if the agencies were privatized. In fact, shares of both agencies soared when <a target="_blank" href="https://x.com/BillAckman/status/1873818034428694837?lang=en”>Ackman published his opinion on x (formerly twitter) on December 30.
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However, Pershing Square Capital, Ackman's investment firm, has a substantial stake in both Fannie Mae and Freddie Mac. While this has led some to question the motivation for privatizing federally supervised housing agencies, It has also elevated the conversation about his future on the national stage.
Ackman believes that ending guardianships Generate an additional $300 million in revenue for the federal government. and at the same time eliminate $8 trillion in liabilities from its balance sheet.
Trump had already tried to privatize Fannie Mae during his presidential term and could try again during his second term, depending on how the housing market progresses. If successful, there could be major implications for mortgage rates and homebuyers.
Privatization could affect mortgage rates
In 1998, mortgage debt represented 61% of US GDP, but in 2006, it had increased to 98%. The rising proportion of real estate debt was an indicator that the average principal mortgage was increasing substantially, paving the way for the housing crisis of 2007-2008.
The Federal Reserve Bank estimates that 3.9 million Americans lost their homes to foreclosures between 2007 and 2010 as a direct result of the real estate bubble.
When Fannie Mae and Freddie Mac were placed under financial conservatorship, the goal was to make the agencies better financially and have more oversight of their operations to protect consumers in the housing market.
Related: Federal Reserve Chair Jerome Powell warns of inflation and housing market weakness
If 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, points out that privatizing these agencies would likely drive up mortgage rates even further, breaking Trump's real estate campaign promises.
“Mortgage rates would probably go up because right now, under the conservatorship, there is a guarantee from the government that if Fannie and Freddie had any problems, they would be bailed out by the government and therefore the investors would be bailed out,” he said. explained. “Which means that consumers are currently getting lower mortgage rates, because investors are willing to lend without demanding such a large risk premium.”
During the election campaign, Trump promised to reduce unmanageable mortgage rates to 3%, levels not seen since 2022. However, privatizing these agencies would make mortgage lending riskier and therefore more expensive, as consumers would bear a greater burden of risk.
Related: Veteran Fund Manager Issues Stark S&P 500 Warning for 2025
