Fannie Mae IPO Could Have Serious Side Effects on Mortgage Rates

Dave:Two thirds of every single mortgage in the United States flow through just three massive government entities, Fannie Mae, Jennie Mae, and Freddie Mac. These companies operate behind the scenes. You may not often think of them, but they are a massive part of the infrastructure that makes the housing market actually run. And the Trump administration is proposing changes that could radically shape how they work. He’s talking about taking Fannie Mae and Freddie Mac public, and this would not be a normal IPO. Changing the ownership structure and the government’s role in these companies wouldn’t just make them subject to public market scrutiny. It could also impact loan availability, housing policy, and yes, even mortgage rates and probably not in the way you’d like them to go. So today on the show, we’re digging into the issue of taking Fannie Mae and Freddie Mac private. We’ll start by talking about what these companies are, why they have such a unique structure as a public-private entity, how they wound up in government hands during the great financial crisis, why there’s talk of taking them public, and how an IPO would impact the housing market and real estate investors alike.This is On the Market. Let’s get to it.Everyone, welcome to On the Market. I’m Dave Meyer. Today, we are talking about a issue that has been making news a lot during President Trump’s second term, and that is taking Mortgage Giants, Fannie Mae and Freddie Mac public. When I say public, that just means listing them on the stock exchange through an IPO, an initial public offering. So basically listing them on the stock exchange. And there is a big debate raging in the industry about whether this is a good idea, what would happen if it actually goes public. And of course, investors, homeowners are all wondering what would this mean for them if this actually happens? So today in the show, we’re digging into it. We’re going to talk all about what these companies are in the first place because they play a very unique and very important role in the housing market. We’ll also talk about the government’s role in these companies and this very weird, unique structure that they have.We’ll talk about the prospects of an IPO, the pros and cons, and what you should be watching as this all unfolds. Let’s get to it. We’re going to start with just the basics here. What are Fannie Mae and Freddie Mac? Fannie Mae, it’s not actually, it’s just kind of a nickname for the company. It’s the Federal National Mortgage Association. It was created way back during the Depression in 1938. The whole goal of it was to create cheaper housing and to get more loans flowing. Freddie Mac is a very similar company. It was created in 1970. It stands for the Federal Home Loan Mortgage Corporation. It was basically created in 1970 to create some competition for Fannie Mae. Now, you probably have heard of these companies, but they are not traditional banks. They don’t actually lend to consumers. What they do is more on the backend.They actually go out and buy mortgages from banks and lenders. They bundle them together into mortgage-backed securities, also known as MBS, and sell those to investors worldwide. So what does that mean? Let’s just break this down. If you go out and get a loan from a bank, whether that’s a local bank, a credit union, even sometimes if it’s from Chase or Wells Fargo or some of these big companies, those banks don’t hold on to the mortgages that they originate. If they did, that would limit how many loans that they could create. They only have a certain amount of deposits. And so at a certain point, they would just give away all the money that they had and then they couldn’t originate any more mortgages. That is not good for their business model. And the government has taken the position that that is also not good for the housing market because it would limit transactions and it would limit availability to the housing market.And so what happens most of the time, this is more common than not, is that that bank, let’s just say it’s Chase, let’s say it’s Rocket Mortgage. They go out and once they’ve originated that loan, they collect the origination fees so they make money. But then they go sell that loan to Fannie Mae and Freddie Mac. And so that goes off the bank’s books and then they get money back that they can go out and lend again. Now what Fannie Mae and Freddie Mac do once they’ve purchased this loan is they bundle them together. Let’s just call it a group of a hundred mortgages, and then they’ll go out and sell that mortgage to a pension fund or to a sovereign wealth fund or any sort of investor who wants to service that mortgage. Because there are investors out there who want to collect the five, six, 7% interest that they can get off of a mortgage.It’s sort of another way that you can get fixed income different than bonds. It’s a little bit riskier than bonds, but investors do this. They go out and buy mortgages. And Fannie Mae are an enormous part of that. They create so much of the liquidity in the mortgage market that allows credit to flow. And because, and we’ll talk about this more in a little bit, there is an implicit guarantee that the government will backstop these mortgages. It lowers mortgage rates. By and large, people who study these things believe that the existence of Fannie Mae and Freddie Mac lower mortgage rates. So big picture here, they are super important. Now, they are not private companies in the traditional way that Walmart or Amazon are. They are actually called a government sponsored enterprise. I’m going to call them GSEs, that’s kind of what they’re known as. And they’re sort of this hybrid kinds of organization because they’re actually chartered by Congress.They have a public mission, so that’s the public side, but they operate historically at least as a shareholder-owned company. That is the private side. So it’s kind of weird. It’s kind of both a government entity and a private entity. Now, the idea at least behind this structure is that it should be operated by the private markets because it’s more efficient and we have a capitalist market-based economy. But the government side, the fact that the government has this quote unquote implied government guarantee allows people like you and me who borrow money in mortgages that are sold through Fannie Mae and Freddie Mac, that allows us to borrow at a cheaper rate. It is also, in my opinion, basically the only reason that a 30-year fixed rate mortgage exists at all in the United States and anywhere in the world because a 30-year fix is basically an American loan that doesn’t really exist anywhere else.And I want to be clear because this will come up later when we talk about the IPO, but the idea that the government guarantees these mortgages and their performance is not actually real. It’s not explicit. It is not written down. It is not legal. It is what they call an implicit guarantee that people believe that the government will back up these mortgages. And as we know in 2008, they did step in in a big way to shore up the mortgage market. But just remember, that is not a guarantee. It is an implicit guarantee, not the same thing. So that’s what they are. And I think one thing everyone should know here is that this is totally unique to the United States. There is no other major economy in the world, at least that I know of, that structures its housing finance this way. And people will have different opinions on whether that is good or bad, but the whole reason our housing market is basically built upon the back of a 30-year fixed rate mortgage that’s prepayable, which is awesome, that is a uniquely American thing.The rates that we get on those 30-year fixed are sort of artificially low or can be that low because of Fannie Mae and Freddie Mac. And to just further emphasize this here, because like I said, the whole housing market sort of built on the back of these entities. Let me just demonstrate that to you in a couple of numbers here. At the end of 2025, according to a Columbia business school analysis, the total US residential mortgage market was about $15 trillion. Fannie Mae and Freddie Mac combined were 6.8 trillion of that. That is just under half of the total mortgage market. Now, we’re not talking about Ginnie Mae here too. That is another government-backed entity. Ginnie Mae is a little bit different. It’s a similar mission, but they do FHA and VA loans. That’s about 20% of the market. So actually, if you look at those three entities combined, Ginnie Mae, Fannie Mae, Freddie Mac, two-thirds of every mortgage originated in the housing market goes through these entities.So when I say they’re important, they are incredibly important. When you compare that to banks that just hold onto those loans, remember I say most of them go off and sell them. When they keep them, that is often called a portfolio loan, portfolio loans are only about 22% of the market. So about a third of the size of the government-backed mortgages that we are all using. So they’re huge in terms of volume, but they do more because the only way that Fannie Mae and Freddie Mac are able to bundle and sell these mortgages as efficiently as they do is by standardizing the mortgages. If you’ve applied for a mortgage, this is why you have to check all those boxes, why they have all of these weird rules, why there is so much paperwork and seemingly nonsensical rules. It’s so that every mortgage, once they reach Fannie Mae and Freddie Mac to be resold, looks relatively similar.And so that when investors go and buy those mortgages, they know roughly what they’re getting. Because when they go and bundle these mortgages and sell them off, these investors, a pension fund is not going to go look through a thousand different mortgages and underwrite them. They are trusting Fannie Mae and Freddie Mac to group them together appropriately. And in order to do that, they have some rigid rules. So that being said, Fannie Mae and Freddie Mac, they set the rules around the majority of mortgages. They set conforming loan limits. They set debt to income ratios. They set down payment standards. These are hugely important elements of who gets loans and how easily the housing market is achievable or affordable or accessible to the average American. So they’re also important in that way. The other thing I should mention that they’ve done in the past that is also, I’m getting tired of saying this, hugely important, is that they are countercyclical.In the past or in other countries that don’t have things like this, when the economy turns south and private capital flees the market, banks don’t want to lend as much or pension funds don’t really want to buy mortgages as much as they might. GSEs keep buying. They are government-backed entities with a public mission. And so they continue to help the plumbing and the infrastructure of the housing market work even when private capital is not as interested. Super important backstop for the housing market. So regardless of what you think about privatization, and we’re going to get to that in just a minute, these companies matter a lot to a housing market. This is just an indisputable fact. So if they’re doing their job, what’s the issue? Why is there talk of taking these companies public? We’ll get to that right after this break. Stick with us.Welcome back to On the Market. I am Dave Meyer. We’re here talking about how government sponsored entities, GSEs like Fannie Mae and Freddie Mac, how fundamental they are to the housing market and why is their talk of IPOing these companies? Why now are we talking about listing these on the stock market? To understand that issue, we briefly have to talk about their history. So I mentioned earlier, Fannie Mae started in 1938. In 1968, it actually privatized. It became a public company. So this is super important. It actually has been a public company in the past starting in 1968. Then Freddie came around in 1970 as I mentioned, but it wasn’t really until the 1990s and 2000s until they really just became these massive financial institutions, huge, huge companies, because they have a big advantage in the market. They could offer lower rates. They’re very competitive compared to other lenders that don’t use conforming mortgages.And so in the ’90s and 2000s, they got huge. But I’m guessing you can see where this goes. In the mid – 2000s, they really started piling into buying, selling subprime mortgages, trying to get bigger and to compete. And partially, I will say, under political pressure to expand homeownership. And we all know what happened from there. The subprime mortgages they bought and guaranteed, they got bad. They were basically giving out loans to people who couldn’t pay, and those started to go belly up. And the whole institution was essentially falling apart, becoming insolvent. So in September 2008, 40 years after Fannie Mae went private for the first time, the FHFA, a government entity, the Federal Housing Financing Authority, placed both Fannie Mae and Freddie Mac, both of these entities into conservatorship. This is basically what has been called, or at the time was built as a temporary federal takeover.It was never meant to last forever, but it was basically to save the companies. The US Treasury at the time injected $187 billion to keep these companies solvent. It was a bailout. They bailed them out to the tune of $187 billion. In exchange for that though, the treasury got some shares in the company, about 80% of the common stock in the company. So the vast majority of all the stock the US Treasury now owned. Basically, government took over these companies, saved them, got some stock in exchange. And in 2012, last thing you need to know is they did something called a net worth sweep. Doesn’t really matter what it means, but it’s just kind of the treasury started taking all the profits for itself as part of getting paid back for the bailout, as being the largest shareholder of these companies. It was taking all of their profits.And that has become, since 2012, since they started doing that, a big legal and political flashpoint for shareholders. So that’s going to come up in this IPO conversation. So you should just know that happened. So basically that is where things stand today. The two companies, Fannie Mae, Freddie Mac, still in conservatorship, 17 years and counting. They have repaid the treasury well in excess of the original bailout. So they’ve repaid it more than that 187 billion. And I guess what’s been going on in the background, because to you and me, to most homeowners, nothing’s really changed. It’s been fine. I don’t know. I’ve been investing for basically all that time, and I haven’t really thought very much about whether Fannie Mae and Freddie Mac are private or in conservativeship. It’s just been operating fine. But common shareholders, people who had invested in these companies prior to 2008 have been trying for years to regain some of the money that they claim that they are owed because it shouldn’t be a government entity.So that’s basically what’s been happening for the last 17 years. But recently, there has been renewed conversation around privatization. Again, when I say privatization, same thing as an IPO, same thing as going public, just listing it on the stock market. President Trump did push for this sort of lightly in his first term. It didn’t happen, but in a second term, he has talked about it a lot more. Back in August of 2025, Trump administration actually met with six of the largest banks to lay the groundwork for an IPO. And their idea, what they floated out there was to sell up to $50 billion in preferred shares. We’ve seen support within the administration. The FHFA director, Bill Polte’s been a very vocal supporter. And so it looked like this was happening. And actually as of late 2025, analysts were projecting that by middle of 2026 around now, an IPO would happen.Now that momentum did slow, has been slow as the administration seems to have turned its attention to the Middle East, but there is still a good chance this happens or at least a push to make it happen. If you look at MBS investors, like people who follow this stuff carefully, everyone bets on everything now. You can look at public markets for anything. It’s about a fifty fifty shot. About 50% of people believe the privatization will happen by 2028. But why? Why now? If it’s been fine for 17 years, what’s the case to actually do this? The reasons proponents are saying this should actually happen are as follows. First, reduce taxpayer exposure to the seven, $8 trillion in mortgage guarantees that Fannie Mae and Freddie Mack have. Taxpayers are ostensibly on the hook for that because the government is so involved in these companies. So that’s one.The other is to generate substantial profit for the government from selling the treasury warrants. They were saying up to $30 billion, but analysts say that the government could earn up to $250 billion by selling this stock. Proponents also say it should be a private company. Let private capital and risk pricing do its job and get the government out of what these people say should be a private entity. And the last thing we should mention, because this is a big thing, is pressure from the common shareholders who own stock in this company have been waiting since 2008 to get some liquidity out of this company. Personally, I actually think this is probably the biggest one. They haven’t been able to monetize their investments and they’ve been vocal about wanting the companies to go private again and to end the conservativeship. But they’ve been saying this for a long time.So the reason why now specifically people are talking about it is because there’s a Republican trifecta in Washington. Republicans have the House, Republicans have the Senate, Republican has the presidency. So it’s politically just easier now than under split government. The other reasons are the housing market, despite being really slow, it is sort of stabilized post-pandemic. There’s not really much evidence that a crash is imminent. So in a stable housing market, it’d be easier to do this. And it also just goes along with a lot of President Trump’s economic agenda, which is to deregulate. And this would be deregulation, getting the government out of a major part of the economy while returning capital to taxpayers. So those are the reasons why it’s being talked about now. But there are pros and cons to this. I think there are important trade-offs in whether or not this should be done.We’re going to get to those pros and cons, but we got to take one more quick break. We’ll be right back.Welcome back to On the Market. I’m Dave Meyer. Today we’re talking about the GSEs, Fannie Mae, Freddie Mac, and going public. Before we talked about what proponents say, and I’ll just summarize again the benefits to the companies going public, and then I’ll talk about some of the cons. So number one, removes taxpayer backstops. So they’re saying government’s guaranteeing these mortgages. So that would go away if it went public. It could attract more private capital into the housing market if rates went up and it was more attractive. Forces some clear pricing. If you are letting the proper amount of risk price mortgages, that might have some benefits. It ends this weird arrangement that the government has, and there could be money up to $250 billion for the US Treasury. So those are some of the reasons, and they’re real reasons to do this. Now, there are some cons to this.So first and foremost, let’s talk about that implicit guarantee. Because the argument that a lot of people make is that if the companies go private, taxpayers are no longer on the hook for guaranteeing these mortgages. And I’ll be honest, I’m sorry, I do not buy that. I do not buy that at all because the companies were private in 2008 and the government bailed them out. And even if they go private, every investor who invests in these companies is going to expect the government to bail out Fannie Mae and Freddie Mac if they do something that screws up again. Even if they go and take risky loans like they did from 2000 to 2006 or whatever, the government bailed them out because they’re “too big to fail.” And so that part of the argument, I just don’t really buy. I just don’t really think that makes sense because I think the government is going to still, at a minimum, implicitly guarantee, remember the difference, implicitly guarantee these mortgages.The second thing, and this is huge for our audience, for anyone who’s an investor here, this is the thing that I think is going to matter to you most. One of the cons, a big one is higher mortgage rates. Like I said at the beginning, the whole reason these things exist is to lower mortgage rates, and they still will if they’re private. I’m not saying that they’re going to go back to what they actually would be without Fannie Mae and Freddie Mac. But because right now there is such a implicit guarantee that the government will back these loans, we, you and me, get mortgage rates as lower at lower cost. And JP Morgan actually looked into this and they estimate that if the government does not switch from an implicit guarantee to a explicit guarantee, explicit guarantee on paper guaranteeing these mortgages so it goes private.If they don’t do that, mortgage rates will go up 45 basis points. That’s what JP Morgan says. So not crazy crazy, but that’s half a percentage point at a time when we don’t need that in the housing market. So something to think about. Maybe it’s better in the long run. I don’t know about that, but in the short run, that could hurt the housing market. That’s something everyone should know. So again, this is another reason I just don’t buy that idea that privatization will get taxpayers off the hook. JP Morgan’s saying not only will they not be off the hook to keep mortgage rates where they are, the government will need to go from an implicit non-legally binding guarantee to an actually explicit legally binding guarantee to keep mortgage rates where they are. So people will have different opinions about that, but the government will still be very involved.And whether you believe that the government should be guaranteeing the performance of a private company or not, I’m not sure I believe in that. Now we’re just getting into my opinion, but if companies are going to go public and they want to earn the benefits and the profits that public companies deserve to make, then the government should not be backstopping them so that they can go out and take risk and do all these things knowing that if they fall and if they screw up and if they push too hard into risk, the government’s going to be there to catch them. Personally not a fan. Or at least if the government has to step in again, there needs to be serious punitive damages. It’s not just repay us the bailout, it’s repay us and we take your profits for the next 40 years. I don’t know, it’s just something like that.But I just don’t like the idea.That’s not a free market if the government’s backing you up. So anyway, I find that whole thing personally kind of weird. The other thing, the other argument against taking these companies private is tighter credit standards. You could start to see, because the government’s not involved, some tighter standards around affordable housing programs, first-time buyer programs, and lending to underserved communities. Those are likely to get scaled back because they’re riskier and the public markets might not have the appetite for those types of loans. We’ve actually already seen the current FHAFA director Bill Pulte pull back on some of these equitable lending programs already. All right, a couple more just arguments against privatization. One is that it could cause another crisis.That’s a big one. I’m not saying this would necessarily happen, but one argument is that these companies were private in the 2000s and they took on extra risk.They did a bad job. They went belly up. If the government didn’t step in, they would’ve been bankrupt. And if the government steps out of this without guardrails, then that could happen again. Not saying it necessarily will, but it could. We’re sort of taking away one of the protections in the housing market that we have. So that’s important to remember. The last thing that people say is really the people who benefit from this are hedge funds. The main people who benefit from this are hedge funds like Bill Ackman, Pershing Square, giant hedge fund. He’s been very adamant about it. He’s probably the most vocal voice here. He stands to gain billions of dollars from this happening. And taxpayers will get some, but they could also get higher mortgage rates, probably still on the hook for all the money these private companies take. And I will just say $250 billion to the treasury, that is good.It’s not really going to change anything.I was doing the math before, and that could pay off 0.6% of the national debt if we raise that amount of money. Not exactly the most exciting. I mean, maybe it can help pay for something, but we’ve got bigger fiscal problems in this country. This is not going to solve them. So where I come out on this is not necessarily one way or another it should happen or it should not. I think the devil is really in the details here. Is there going to be an implicit guarantee kind of what we’ve had? If so, and they go private, rates will probably go up. Is there going to be an explicit guarantee? Then we’re not really getting the benefit of getting taxpayers off the hook for private company behavior, but we’ll keep mortgages lower. What actually happens here? And do we do it all quickly? That is one thing Bill Ackman of Pershing Square, he has pushed for a slow rollout.So not selling all of the treasury shares all at once and instead doing it sort of dripping it out so the market can adjust and credit markets can adjust and doing it slowly. And so I personally feel I would like to reserve judgment until I understand exactly how it might be done. But I will just say in general, I think that private companies should be on the hook for their own behavior. They reap enormous profits and enormous rewards for what they do. And that’s how our economy works. But you don’t get capitalism on the way up and socialism on the way down. I’m not a fan of that. And they got bailed out once, and I actually agree with that bailout. It made sense. Given what happened in 2008, the housing market already collapsed. It wouldn’t have recovered yet probably if the government did not bail out Fannie Mae and Freddie Mac and some of the banks in the way that they did.But I just don’t think that should be last resort. And although I’m not always a fan of government intervention and government taking over private businesses, but this one kind of worked. A lot of times it doesn’t, but this one did sort of work. And so I personally would be a fan of if they’re going to unwind the way it works, unwinding it slowly and doing it a way to make sure that access to loans, access to home ownership remain the same, and that rates stay low in some way and doing that ideally without taxpayers being indefinitely on the hook for the behavior of these two private companies.That doesn’t make sense to me. So hopefully they can figure out a way to do that if they’re going to take them private at all. Those are the kind of things that I would like to see. But as of now, we actually don’t know if these things are even going to happen.So there’s a lot of strong political will. The groundwork has already been laid with banks. Treasury has authority to act on this stuff without Congress. So there’s some momentum towards these things, but we still have to see if and how it’s actually going to happen. So what does this mean for you? One, you don’t need to panic. This is nothing that you need to worry about right now. I got a lot of questions about this, so this is why we made this episode. But even if privatization happens, it’s not going to happen overnight, I don’t think. I think it’s most likely that they phase it in so the markets don’t go crazy, but what you’re going to want to watch out for is this implicit versus explicit guarantee. If there’s an implicit guarantee in a privatization, I think rates will go up a little bit.If there’s an explicit guarantee, rates will probably stay the same. So these are the kinds of things that you should be watching for when you’re planning your own decisions around going out and getting a mortgage. I guess the only thing I would say is that if you are a first time home buyer or if you are looking to take advantage of some of the programs that they have, like HomeReady or Home Possible, that expand home ownership or access to loans to promote home ownership, I should say, those might go away. So if you’re thinking about using those, might want to speed up that timeline. Now, I don’t think this is happening in the next month or two, but by the end of the year, before the midterms, it’s possible. So if you were thinking about using those programs, might want to look at that now.But the real things that will matter is this implicit, explicit guarantee. And if rates start to go up, that will matter in the short run. And long run, I think it does matter if the government’s guaranteeing these mortgages, but that might take 10 years to play out, 20 years to see if that’s a good decision or not. We don’t know, right? The rate thing will hit the market immediately. If they do this now and rates go up, man, that wouldn’t be good for the market. We already seen what’s happened since the war in Iran started when rates were at six, they’ve gone to six and a half now. It’s slowed down the market. If they go to seven, it’s not going to crash, but man, just makes the recovery take even longer. It’s going to push prices down a little bit more. So this is the thing that we need to watch and see if this privatization happens in the near term.That’s our show for today. Thank you all so much for listening to this episode of On the Market. I’m Dave Meyer, and I’ll see you all next time.