President Donald Trump has announced plans to privatize two giant mortgage-backed entities, Fannie Mae and Freddie Mac, sparking concerns about the potential risks of reactivating the speculative mortgage market that led to the 2008 financial crisis.
Trump’s proposal would involve taking these companies public through an initial public offering (IPO), but he claims the US government will maintain implicit guarantees for their debt. Critics argue this would be a recipe for disaster, as private companies with government backing are often seen as the worst of both worlds – lacking accountability and subject to market fluctuations.
Fannie Mae, created in 1938, was originally a public entity designed to regulate mortgage lending standards and stabilize the mortgage system. However, after being taken private in 1968, it began to engage in riskier practices and ultimately required a government bailout during the financial crisis.
The Financial Crisis Inquiry Commission found that Fannie Mae and Freddie Mac were grossly undercapitalized, with a capital ratio of less than 2%, leading to huge losses. The entities eventually fell into conservatorship, but have since operated efficiently under government oversight, helping standardize loan terms and building standards for multifamily units.
Privatizing these companies would allow hedge funds and private equity firms, which have invested heavily in their stocks, to reap significant profits. However, it could also lead to a reversion of the mortgage market into speculative practices, leaving ordinary people vulnerable to economic carnage.
Critics warn that releasing Fannie Mae and Freddie Mac from conservatorship could allow past abuses to return, adding trillions of debt to the US government’s books. Legislation may be needed to address these concerns, as the companies’ new status would likely trigger a reassessment of their accounting standards, potentially raising the risk of deep losses.
Ultimately, Trump’s plan has raised significant questions about how it will impact the availability and cost of mortgage credit, with some warning that it could imperil the entire mortgage market.
Source: https://prospect.org/power/2025-06-03-privatizing-speculative-gain-socializing-risk-fannie-mae