Trump Administration Works to Find a Way to Spin Off Mortgage Giants

‘At the end of the day, you don’t want them in government hands,’ Heritage Foundation economist E.J. Antoni said.

A view of Fannie Mae headquarters in Washington. Karen Bleier/AFP/Getty Images

Attempting to complete a plan that started during President Donald Trump’s first term, the current administration is working to finally close the books on the mortgage crisis of 2008–2009 by unwinding the federal takeover of mortgage giants Fannie Mae and Freddie Mac.

“I am working on TAKING THESE AMAZING COMPANIES PUBLIC, but I want to be clear, the U.S. Government will keep its implicit GUARANTEES, and I will stay strong in my position on overseeing them as President,” Trump wrote in a post on Truth Social on May 27.

Bill Pulte, director of the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac (the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., respectively), predicted that they would bring “trillions of dollars worth of value to the American taxpayers.”

The specifics of how this can be achieved remain unclear. However, an upcoming June 17 meeting announced by Pulte, which will include Treasury Secretary Scott Bessent, Housing and Urban Development Secretary Scott Turner, and Securities and Exchange Commission Chairman Paul Atkins, may establish a roadmap.

“While some have suggested the administration isn’t serious about moving forward this year, I would suggest when the President of the United States goes into technical detail about a major policy issue—not once but twice in a single week—and assigns multiple cabinet officers to address an issue, it’s already moving forward,” National Housing Conference CEO David Dworkin stated in a June 1 op-ed.

These government-sponsored enterprises (GSEs) play a central role in both the U.S. housing market and the bond market. Currently, about 45 percent of outstanding single-family mortgages and about 50 percent of multi-family mortgages are held or insured by Fannie Mae and Freddie Mac, according to a report by Laurie Goodman, founder of the Housing Finance Policy Center at the Urban Institute.

But the GSEs have remained in a state of limbo since being taken over by the federal government nearly two decades ago. And returning them to something resembling their pre-2008 structure and function will be no easy task.

“Like most panicked decisions that politicians make, which is exactly what this was, taking them under conservatorship, there was no thought as to how we eventually get out of this in the future,” E.J. Antoni, chief economist at The Heritage Foundation’s Center for the Federal Budget, told The Epoch Times.

“There are a couple of different paths to do it, ... which involve essentially reversing the steps that were taken in terms of the government taking over both entities.

“At the end of the day, you don’t want them in government hands. As it stands right now, any additional losses that these institutions incur are just going to fall on the backs of taxpayers.”

The Rescue Plan of 2008

The GSEs were put under government conservatorship in 2008 to rescue them from bankruptcy brought on by massive losses from collapsing home prices and delinquencies in the mortgages they had bought or insured. Rather than nationalize the GSEs outright, the government acquired senior preferred shares in the entities that gave the newly created FHFA full control over their operations, in exchange for federal bailout funds. (Preferred shareholders have higher-ranking claims.)

This preferred stock, consisting initially of 1 million shares with additional warrants to acquire 79.9 percent of the GSEs’ common stock, paid dividends at 10 percent per year, Goodman said. To cover their losses, the GSEs drew $191 billion from the U.S. Treasury under this agreement, but they have to date paid $301 billion as dividends on the senior preferred shares.

“Some have argued (most vocally those who owned GSE junior preferred or common stock) that the Treasury’s original ‘bailout’ investment in the GSEs has been repaid with interest and should be forgiven,” Goodman wrote. “But because it was not structured as a loan, there is no mechanism for doing so.”

Trump’s announcement caused GSE shares to rally by more than 50 percent, indicating some confidence, or at least speculation, that administration officials will find a way to privatize them, despite the many hurdles.

“Under statute, FHFA must either restore Fannie and Freddie to a ‘sound and solvent’ condition or place them in receivership,” Lydia Mashburn Newman, managing director of Monetary Economics at the American Institute for Economic Research, told The Epoch Times.

“Seventeen years later, they remain in conservatorship—neither recapitalized nor resolved—disregarding both law and precedent.

“The GSEs have massive capital shortfalls to the tune of $200 billion for Fannie and $140 billion for Freddie. Without adequate capital to protect against losses, the GSEs risk repeating failure.”

Preparing for the Exit

Under conservatorship, the GSEs have made significant progress to improve their operations, Goodman said. This included implementing a strategic plan to increase first-loss capital and reduce the risk to taxpayers, transferring portions of the credit risk in their mortgage portfolios to insurers, upgrading their analytics systems, and increasing the fees they charge to guarantee mortgages.

“The GSEs have largely evolved to accomplish many of the goals of legislative reform,” Goodman wrote. “They have effectively become market utilities, assuming and distributing the risk of a significant portion of the mortgage market.”

In January 2021, the Treasury Department issued a memo that outlined the steps the GSEs could take to exit conservatorship, while receiving “an explicit, full faith and credit federal guarantee for the GSEs’ mortgage-backed securities,” although providing such a guarantee would require an act of Congress.

According to this memo, the GSEs must, among other things, build or raise “sufficient equity capital to facilitate their ability to operate through a severe downturn,” and develop a capital structure that would attract third-party investors once the government exits its preferred share position.

The options to raise capital include using retained earnings, much of which currently go to the Treasury as preferred share dividends, or issuing new shares through an initial public offering (IPO).

How this process will affect housing markets depends to some extent on which path they choose, Newman said. If the GSEs recapitalize through retained earnings, that could reduce their appetite for new mortgages, reducing liquidity in mortgage markets; if they recapitalize through an IPO, it could have the opposite effect.

“But the core issue for buyers isn’t access to credit—it’s affordability,” she said. “More capital chasing a limited stock of houses only drives prices higher, sidelining especially first-time buyers.”

What Role Should Fannie and Freddie Play?

This raises the bigger issue of what the mission and role of the GSEs should be—and whether Americans really need them at all in order to be able to buy homes.

Fannie Mae and Freddie Mac were created by the federal government to foster homeownership in America. By purchasing home loans from banks and providing repayment guarantees, these organizations created a secondary market where mortgages could be repackaged, sold, and traded, ultimately allowing for the emergence of the standard 30-year fixed-rate mortgage.

The logic was that creating a liquid market into which mortgages could be sold would allow banks to generate more home loans, at fixed rates and for longer maturities. In this way, government guarantees would bring homeownership within reach for everyday Americans, reducing the cost of borrowing and structuring loans into predictable monthly payments.

Americans, in turn, would become more responsible citizens, more deeply rooted and invested in their communities. And while houses are not always the most lucrative investments, once taxes, repairs, and transaction fees are taken into account, the mortgages imposed financial discipline on borrowers and provided a way for average families to leverage their incomes and build wealth.

For many Americans, particularly those in the middle class and below, this plan has shown signs of success. According to a 2024 analysis by the Federal Reserve, houses are the most valuable asset owned by the bottom 90 percent of Americans (categorized according to their net wealth).

Source: Survey of Consumer Finances and Financial Accounts of the United States

However, critics argue that government intervention, for all its good intentions, has also driven up the price of homes, putting them out of reach for many middle-class and first-time buyers.

A survey by the National Association of Realtors, for example, found that in today’s market, a household earning $50,000 can afford only 8.7 percent of listed homes, down from 9.4 percent a year ago. Households earning $75,000 per year—which include many teachers, nurses, and skilled trades workers—can afford 21.2 percent of listings.

“Once you give people these vehicles by which they can now borrow a lot more and maintain the same monthly payment, you now put everyone in an escalating bidding war where we start bidding up the price of homes,” Antoni said, likening the housing market to how the cost of college has been driven up by government-sponsored student loans. “And so what was designed to essentially create easier credit terms and therefore make homes more affordable, instead made homes less affordable because all it did was expand the credit that you can apply to the purchase of a home.”

Decades of Debt

Another issue with standard 30-year mortgages is that, while reducing monthly payments, they also put borrowers in debt for much of their adult lives.

“The 30-year fixed-rate mortgage is a uniquely American, government-created product, designed in the 1930s to lower monthly payments by stretching out loans,” Newman said. “While some credit the 30-year mortgage with expanding access to ownership, it’s also saddled homeowners with more debt and higher lifetime costs.”

At current mortgage rates, a mortgage on a $350,000 house can feature total payments of $750,000—more than double the price of the home, she said, with most of the interest paid up front. By comparison, a 15-year mortgage costs more each month but saves more than $250,000 over its term.

In addition, Newman said, “government policies often aim to boost homeownership but backfire, like in 2008, pushing unsustainable homeownership that hurts the very consumers they intend to help.”

This was a time when mortgage lenders, with strong encouragement from the federal government, loosened their credit standards and provided “teaser-rate” loans to so-called subprime borrowers, many of whom subsequently defaulted when rates rose, and then were evicted from their homes.

Analysts also point to tensions inherent in the public-private structure of the GSEs, as well as the risk of privatized profits but socialized losses.

“The charters of their organizations required Fannie Mae and Freddie Mac to promote market stability and access to mortgage credit,” Goodman wrote. “But their private shareholder structure encouraged management to take excessive risk to retain market share and maximize profits, putting taxpayers on the hook.”

In the end, however, GSE investors didn’t emerge unscathed from the mortgage crisis either. As Goodman stated, “shareholders at the time of conservatorship were largely wiped out.”