Max Bocken
Associate Editor
Loyola University Chicago School of Law, JD 2027
Last month, the Trump Administration announced that it is pursuing an initial public offering (IPO) of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), both of which are currently under government conservatorship and overseen by the Federal Housing Finance Agency (FHFA). While there is no guarantee that the deal will move forward, President Donald Trump, FHFA Director Bill Plute, and Commerce Secretary Howard Lutnick believe the offering will take place soon, potentially later this year. While boasted as a great deal by the Trump Administration, given the size, risks, and the likely results that will follow the deals commencement, it is more likely to destabilize the mortgage market and further harm the currently sluggish U.S. housing market than to provide any benefit to U.S. citizens.
Congress created Fannie Mae in 1938 in response to the Great Depression’s negative effects on the U.S. housing market. After successfully expanding the capacity at which lenders can provide mortgages and becoming a giant in the secondary mortgage market, Congress later created Freddie Mac in 1970. Freddie Mac was formed to prevent Fannie Mae from monopolizing the secondary mortgage market. Together, Fannie Mae and Freddie Mac share the goal of providing stability and liquidity in the mortgage market and promote the expansion of mortgage creditors’ lending capabilities. They achieve their mission by buying mortgages, packaging them into mortgage-backed securities, and then selling these securities to investors.
The process and importance of the mortgage-backed security
The process of selling mortgage-backed securities starts with banks and private institutions giving loans to homebuyers in exchange for a mortgage. These mortgages represent an interest in the borrower’s home and allow a creditor to take possession of it in the event the borrower defaults on their loan. Banks then take these mortgage loans and sell them to Fannie Mae and Freddie Mac, which then structure the loans into mortgage-backed securities based on similar characteristics, such as interest rates and maturity dates. After packaging these loans into mortgage-backed securities, they sell these securities to investors. These securities are similar to bonds in the sense that they provide periodic payments to investors, but unlike bonds, the payments provided are backed by the cashflows from the principal and interest payments on the loans that make up the underlying security. If the underlying loans in the security default, or in other words, if buyers are unable to make payments on their loans, Fannie Mae and Freddie Mac guarantee to take on the loss and make up the difference to ensure consistent returns for investors. Since they guarantee consistent returns for investors and are implicitly backed by the federal government, the mortgage-backed securities provided by Fannie Mae and Freddie Mac have the highest credit quality.
Mortgage-backed securities, in particular Fannie Mae and Freddie Mac, play an integral role in the American mortgage market and substantially affect the countries affordable housing. Today, three in five mortgages in the United States are packaged into a mortgage-backed security. Fannie Mae and Freddie Mac collectively guarantee about $6.6 trillion in mortgage backed securities alone. This accounts for 50% of all outstanding U.S. mortgage debt. By purchasing creditors mortgage loans, they provide readily available access to funds for thousands of creditors and significantly decrease these organizations default risk by taking loans off their books. Furthermore, by guaranteeing returns on their mortgage-backed securities, they increase the pool of potential investors in the market, infusing the market with more capital that trickles down to lenders who then use it to provide additional lending to aspiring homeowners. In addition, their guaranteed return on investment and promise to purchase mortgages from lenders, no matter the condition of the economy, provides stability for investors and lenders. These factors encourage and allow banks to offer appealing mortgage loans with characteristics not available in almost any other country, specifically the 30-year fixed rate mortgage, a mortgage that enables many Americans to afford purchasing a home due to its low monthly payments and set interest rate. Without Fannie Mae or Freddie Mac, Americans could see a decrease in available lending and an undesirable change in loan characteristics, such as prices and rates. This could potentially lead to many Americans being priced out of homeownership.
The risk of taking Fannie Mae and Freddie Mac public
Although Fannie Mae and Freddie Mac have always been government sponsored entities (GSEs), they were once independent publicly traded companies. However, during the 2008 financial crisis both GSEs became insolvent; to prevent further downturn in the economy, they entered into conservatorship agreements with the newly established FHFA. Under the agreements, the FHFA took a 79.9% ownership stake in each company and assumed complete control over the management of the organizations. In exchange they gave the GSEs $190 billion in capital to cover the losses they sustained on the sale of exceptionally subpar mortgage-backed securities. Shortly thereafter, both companies were delisted from the New York Stock Exchange.
Now, the Trump Administration is attempting to once again take both Fannie Mae and Freddie Mac public. While not many details have circulated regarding the offering, it is believed that the government will sell roughly 5% of its 79.9% ownership interest in each GSE, which they believe will bring in roughly $30 billion. If true, this would be the largest IPO ever and set the combined valuations of the two companies at $500 billion. The government has stated that it is pursuing this transaction in hopes of reducing the country’s growing deficit and return value back to taxpayers that was lost when the federal government bailed out both entities during the 2008 financial crisis.
However, the potential risks of this transaction far outweigh any potential benefit the government is seeking to accomplish. This offering risks the destabilization of the U.S. mortgage market as well as an almost certain increase in mortgage rates if the government were to no longer implicitly backs the two GSEs. On the other hand, if the government were to take the entities public and continue to implicitly back them, they would return both the entities and the mortgage market as a whole back to the conditions that led to the 2008 financial crisis.
The mortgage-backed securities offered by Fannie Mae and Freddie Mac attract investors in large part due to their guaranteed return on investment and implicit backing by the federal government. Taking the entities public puts the government in a strange position, leaving many wondering whether or not the federal government will continue to back the securities offered by the GSEs. If not, the mortgage market, which is highly sensitive to the perceived level of government support, is likely to lose investors in the market or have investors demand higher yields on the securities they purchase. In either case, this would result in an increase in mortgage rates. As of September 11, 2025, the current 30-year fixed mortgage rate is 6.35%. While down from the previous five year high of 7.79% in 2023, research shows that even a quarter point increase in the 30-year fixed rate mortgage can price over 1.14 million U.S. households out of the market for a median-priced new home. A whole percentage increase could lead to the pricing out of over four million U.S. households.
If the government were to instead decide to take the entities public with their continued implicit backing, they would be recreating the morally hazardous environment which contributed to their failure during the 2008 financial crisis. They would be building private institutions backed by the guarantee of the U.S. government, which from past experience has been shown to negatively influence creditors. Specifically, during the 2008 financial crisis this environment contributed to creditors lending riskier products to homebuyers and encouraged both Fannie Mae and Freddie Mac to buy these products in order to drive up returns for their private investors. In essence, the U.S. government would be privatizing the returns on these companies and spreading out the potential losses on the U.S. taxpayers.
The best course of action is to keep both Fannie Mae and Freddie Mac under government conservatorship. While the government has adamantly focused on reducing the federal deficit since President Donald Trump has taken office, they should pursue other options that would not risk mortgage rate increases as well as lending and housing instability in an already sluggish U.S. housing market.