Fannie Mae and Freddie Mac are government-sponsored enterprises that play a central role in America’s housing market. They buy qualifying mortgages from lenders, bundle them into mortgage-backed securities, and sell them to investors. This frees main street lenders to make new loans, keeping credit flowing and rates lower for homebuyers.
But excessive risk-taking by these enterprises helped bring about the 2008 crash and Great Recession, leading them to be placed under federal conservatorship. This arrangement kept the enterprises solvent, transferred governance to the Federal Housing Finance Agency, and set operational guardrails to safeguard the stability of the housing market.
The Trump Administration says privatization will spur innovation and improve housing affordability. But if hastily done and without strong safeguards, it would do the opposite: raise borrowing costs for everyday Americans and encourage the type of risk-taking that fueled the Great Recession.
There is no urgency to re-privatize Fannie Mae and Freddie Mac—they have been operating successfully under conservatorship since 2008. And any eventual release from conservatorship should be deliberate, transparent, and grounded in the public’s interest. Numerous design features would need to be resolved, but two components are essential: a government backstop for bad times and strong operational guardrails for good times. Together, these “twin pillars” can achieve systemic stability and support mortgage affordability.
These “twin pillars” are tied directly to how the U.S. housing market operates. Investors readily buy Fannie Mae and Freddie Mac’s mortgage-backed securities because they are guaranteed to receive payments, much like an insurance policy. To guarantee that they can make those payments to investors, even when there are defaults on the underlying mortgages, these enterprises in turn charge lenders a guarantee fee, which is mostly passed on to borrowers. And if reserves prove insufficient during a major economic downturn, markets assume the U.S. government will bailout the enterprises, which are widely seen as “too big to fail.”
But this same government backstop—vital especially in downturns—also encourages excessive risk-taking. Pre-recession, this implicit backstop allowed Fannie Mae and Freddie Mac to borrow cheaply, hold onto their mortgage-backed securities instead of selling them, and profit on spreads between homebuyer payments and their own low borrowing costs. That profit motive fueled risky behavior: loosened loan standards, large discretionary holding of securities, and thin reserves. When the 2008 crisis hit, they quickly ran out of money, triggering the government bailout and conservatorship central to the current privatization debate.
Reviving these profit opportunities is a key motivation behind re-privatization efforts. To safeguard against excessive risk-taking and tax payer bailouts, conservatives have long advocated eliminating the government guarantee of a bailout. If that were to happen, Fannie Mae and Freddie Mac would need to charge higher guarantee fees that fully reflect default risks. In theory, any excessively risky actions by these enterprises would result in higher guarantee fees, making their loans less attractive—market discipline in action.
But privatization in this way is dangerous.
Third, privatization with a government backstop—even if implicit—risks recreating the conditions that fueled the Great Recession. Any for-profit company that can borrow unlimited amounts of near risk-free debt would do so over time because it would maximize profits. As mentioned earlier, there are already proposals to weaken reserve guardrails to boost profitability when re-privatized.
This is why privatization without strong safeguards doesn’t work. A government backstop is essential, but as long as investors expect one, the enterprises will still enjoy below-market borrowing costs and the same incentives for excessive risk-taking. Without sufficient guardrails and oversight, excessive risk taking is not an if but when. These are market failures that cannot be solved by market forces alone.
Taken together, the “twin pillars” of a government backstop and strong oversight and guardrails ensure liquidity and stability. And the resulting funding advantage enables the enterprises to sustain their affordable housing goals. Their below-market borrowing costs effectively subsidize all the loans they guarantee. But by pricing higher-income loans closer to market rates, they generate profits that help expand mortgage access and lower costs for lower-income homebuyers—strengthening economic resilience. These outcomes are possible not in spite of guardrails on profit-taking, but because of them.
While many other issues would also need to be resolved to end the conservatorships, these pillars must be the foundation. Without them, the risks of a second Great Recession are impossible to ignore.
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