Fannie Mae and Freddie Mac: Understanding the Debate Over Privatization
A decade into the Great Depression, the U.S. housing market was barely breathing. Credit had evaporated, foreclosures were mounting, and homeownership—once the cornerstone of the American dream—was fading fast.
With the housing market in freefall, FDR had two options: stand back and watch, or redraw the rules entirely. He picked up his executive pen, and Fannie Mae was born.
Not a typical government agency and not quite a private company, it was a strange hybrid—a government-sponsored enterprise, or GSE. Its job: buy up mortgages, free up bank capital, and restore the flow of home loans.
It worked. Too well, some would say.
By the late 1960s, Fannie Mae had grown into a financial giant, dominating the secondary mortgage market and holding massive sway over U.S. housing finance. Recognizing the risk in even a well-intentioned institution growing too powerful, policymakers introduced some healthy competition in the form of a little brother for Fannie: Freddie Mac, launched in 1970 to keep the market balanced and avoid monopolistic control. This marked the beginning of a new era in American finance, with two entities operating in tandem to purchase mortgages, transform them into tradeable securities, and sustain the constant flow of capital that keeps homeownership within reach.
The genius of the dual-GSE structure lies not only in its mechanics, but in its underlying philosophy: robust competition drives innovation, and a shared purpose maintains stability. By creating a secondary mortgage market where loans could be efficiently packaged and sold to investors, Fannie Mae and Freddie Mac didn’t just solve a Depression-era crisis; they created a system that would anchor the American economy for generations.
The Collapse of Two Titans
But when the mighty fall, they fall hard.
During the 2003–2007 housing bubble, private investment banks led the subprime charge—but Fannie Mae and Freddie Mac weren’t far behind. Eager to defend their turf, they loosened underwriting standards and bought huge volumes of securities backed by risky loans. Fannie, in particular, dove deep into subprime territory.
By the time the bubble burst, the GSEs had over $5 trillion in combined obligations and were, according to the Financial Crisis Inquiry Commission, “grossly undercapitalized.”
Foreclosures soared. The market seized up. And suddenly, Fannie and Freddie were the last major buyers still standing—forced to keep purchasing mortgages, even the toxic ones, to keep the system from collapsing.
In September 2008, the government stepped in. Both GSEs were placed under conservatorship—a legal limbo where they remained technically private but were fully controlled by a federal regulator. Their boards were sidelined, profits rerouted to the Treasury, and key decisions handed to Washington. The bailout was massive. They ended up drawing $191.4 billion from taxpayers—an extraordinary intervention that few saw coming, and even fewer forgot. And yet, despite the scale of the bailout, they didn’t just survive—they turned a profit. As of today, they’ve paid back $279.7 billion, generating over $88 billion in net gains for the government.
What began as a stopgap became a long-term arrangement—and their fate has been in limbo ever since.
Trump’s Privatization Push
A few months ago, President Donald Trump announced he was “giving very serious consideration” to privatizing Fannie Mae and Freddie Mac. It wasn’t his first time. He’d pushed for it in his first term, but ran into a wall of political resistance, competing priorities, and the sheer complexity of pulling it off—and now, with the GSEs generating steady profits under federal control, he may see a window to finish what he started.
To Trump, the case is simple: the government shouldn’t be in the mortgage business. The longer the GSEs stay in conservatorship, the more they blur the line between public mission and private enterprise. And the bigger the moral hazard—why would investors behave cautiously if they expect Uncle Sam to step in every time?
Some in the financial world agree. Hedge funds and private investors who hold shares in the GSEs are eager for privatization, hoping it’ll unlock long-frozen shareholder value. That includes the federal government, which holds a 79.9% warrant stake in both GSEs—potentially worth tens of billions. Treasury and the Federal Housing Finance Agency have even floated roadmaps. But moving from government control to private hands is easier said than done.Privatization would require navigating a thicket of legal, political, and structural obstacles: congressional sign-off, regulatory redesign, housing affordability mandates, and deep questions about who takes on credit risk if the government steps back. Trump may want out—but there’s no emergency exit.
Potential Repercussions of Privatization
Critics warn that without a federal backstop, the entire mortgage system could become riskier, more expensive, and less accessible.
Start with interest rates. If lenders can’t rely on an implicit government guarantee, they’ll raise rates to cover the added risk. A 2–3 point spike could make homeownership unaffordable for millions and derail investment math across the board.
But the problem isn’t just price—it’s reach. Private lenders, freed from any public mandate, may retreat from borrowers with weaker credit or lower incomes. Communities that rely most on affordable housing could be the first locked out.
That brings us to multifamily. Fannie and Freddie finance about 40% of the apartment market, including a huge share of affordable units. If that lifeline disappears, investors may still finance deals—but at a much steeper cost. A $5 million loan could carry $200,000 more in annual interest. That cost gets passed down, unit by unit, to renters.
The housing market runs on predictability. Shake that too hard, and the ripple effects hit everyone—from first-time buyers to institutional landlords.
The Verdict Is Still Out
Fannie Mae and Freddie Mac were designed to make housing finance work—for lenders, for borrowers, and for the system as a whole. They succeeded, then failed spectacularly, then became something no one quite planned for: profitable, permanent, and politically untouchable.
Privatization could unlock long-term value, restore market discipline, and finally resolve a crisis that’s been dragging on for over a decade. Or it could fracture the system that props up $11 trillion in mortgages and helps finance 40% of America’s apartments.
For borrowers, the stakes are affordability. For investors, it’s certainty. For the country, it’s a question we’ve dodged since 2008: should housing be treated as a public good, or a private risk?
We’re still waiting for an answer.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.