Paulson did not respond to a request for comment.
Ackman, the CEO of hedge fund Pershing Square, has said ending government conservatorship could reward taxpayers while maintaining widespread home availability and affordability.
For Susan Wachter, a professor of real estate and finance at the University of Pennsylvania’s Wharton School, the heavily regulated model for utilities—where state agencies decide how much companies can charge consumers—has proven its worth. She also sees parallels to the insurance industry, where regulators oversee rates to protect customers while also preventing risk from being underpriced.
“It helps insure against another bailout,” she told Fortune, “and it helps maintain profits in the long run.”
As they competed for business, Fannie and Freddie had not collected adequate fees to compensate for taking on this risk, Wachter said.
“If these entities go private without oversight, there is a risk of a race to the bottom,” she said.
Both institutions also got into trouble by buying large amounts of riskier, private-label mortgage-backed securities to hold as investments. They financed these purchases with cheap debt accessible thanks to the so-called “implicit guarantee,” or the belief among investors—which ultimately proved correct—that the government wouldn’t let the enterprises fail.
Wachter believes reforms instituted under conservatorship have made Fannie and Freddie much more resilient while remaining relatively effective at encouraging middle-class homeownership.
The early days of the COVID-19 pandemic provided a major test, she said, when a massive spike in unemployment briefly sparked fears of another mortgage market collapse.
“Fannie and Freddie could go on, continue to lend,” said Wachter, co-director of the Penn Institute for Urban Research, “even as it offered forbearance to borrowers.”
Both enterprises remain central to a fixture of the American dream: the 30-year, fixed-rate, prepayable mortgage. Of course, some question whether continuing to favor that New Deal-era invention is still worth the cost.
“But I think what that debate misses is that if you keep the government backing to these giants, you are going to restrict [the] private market and private competition,” Amit Seru, a professor of finance at the Stanford Graduate School of Business, told Fortune. “And that means giving up on lots of innovative products.”
In many European countries, Seru noted, that’s less of a problem thanks to products that allow people to sell their house, buy a new one, and take their existing mortgage with them. That’s typically not possible in the U.S., he said, because Fannie and Freddie’s dominance means originators can’t stray too far from the industry standard.
“No one can compete with the government,” said Seru, a senior fellow at the Hoover Institution, a conservative-leaning think tank.
Ackman, meanwhile, sees Fannie and Freddie remaining at the core of the American mortgage market. To facilitate a public offering, Ackman has suggested the Treasury cancel its roughly $350 billion worth of senior preferred shares, meaning it would forgive its right to repayment and dividends. That would remove a massive liability from the enterprises’ balance sheets, making them much more attractive to private investors.
If Washington cancelled its entire senior preferred stake, the value of the warrants would increase by roughly $280 billion.
That would be the most lucrative outcome for Ackman, who alternatively could see the value of his common stock diluted to almost zero if Fannie and Freddie go public without the Treasury cancelling most of its senior stake.
“[Fannie and Freddie] shareholders don’t have their hands out,” Ackman wrote in his social media post last week. “The opposite is the case. Hundreds of billions of dollars of funds that belonged to [Fannie and Freddie] were unilaterally taken by the government years ago, and the companies never received credit for these payments.”
Wachter and Seru don’t necessarily disagree. Still, they ultimately see the government’s senior preferred shares as a sideshow compared to bigger questions about what Fannie and Freddie should look like as private enterprises.
“There is a lot at stake here,” Seru said, “which I think goes well beyond Ackman’s investments.”
