Imagine my surprise scrolling through Truth Social yesterday when former President Trump casually dropped what amounts to a multi-trillion-dollar policy proposal affecting the backbone of American housing finance. Trump announced he plans to return mortgage giants Fannie Mae and Freddie Mac to public ownership while maintaining their implicit government guarantees—potentially resolving one of Washington's longest-running financial soap operas.
"We should return Fannie Mae and Freddie Mac to the markets, after obtaining appropriate compensation for taxpayers for the federal backstop," Trump posted, adding that this would "increase homeownership rates and lower mortgage rates by at least 1 percent."
Look, I've spent over a decade watching administrations from both parties struggle with what to do about these peculiar institutions. For those who haven't been obsessively following this saga (congratulations on having a healthy work-life balance), here's a quick refresher: Fannie and Freddie are the bizarre public-private hybrids that keep America's 30-year fixed-rate mortgage market humming along by purchasing mortgages from lenders, packaging them into securities, and guaranteeing timely payment to investors.
Before the 2008 crisis, they operated as privately-owned entities with an implicit government guarantee—a classic case of privatized profits and socialized losses that ended exactly as you might expect. When the housing market collapsed, taxpayers bailed them out to the tune of $187 billion and placed them into "conservatorship," a limbo state where they've remained for 16 years while sending their profits to the Treasury.
The question of what to do with these mortgage giants has become Washington's most expensive game of hot potato. The Obama administration talked about winding them down but never pulled the trigger. The Trump 1.0 administration floated various privatization plans that never materialized. Biden's team has largely maintained the status quo.
Now Trump is proposing what finance nerds call "recapitalization and release"—essentially rebuilding their capital buffers and returning them to public markets while maintaining that all-important government backstop.
The model that helps explain this approach is something I'd call "having your cake and eating it too." It attempts to harness private market discipline while preserving the unique benefits that come from government support. This hybrid approach makes some theoretical sense—after all, pure private markets have repeatedly failed to deliver the 30-year fixed-rate mortgage at scale, while pure government entities tend toward inefficiency.
But here's where it gets tricky. The "implicit guarantee" Trump mentions is essentially a free put option from the government to investors—the kind of thing that normally costs real money. Pricing this guarantee correctly is crucial, otherwise we're just recreating the same misaligned incentives that led to the 2008 collapse.
Trump's claim about mortgage rates dropping by "at least 1 percent" is... let's call it optimistic. The spread between conforming loans (those eligible for Fannie/Freddie purchase) and jumbo loans (too large for GSE backing) is typically much smaller than that, suggesting the government guarantee doesn't create that much interest rate benefit.
I mean, we've seen this movie before. The fundamental tension in housing finance policy remains unresolved: We want the benefits of government support (lower rates, widely available 30-year fixed mortgages) without the costs (taxpayer exposure, moral hazard). No administration has found that perfect balance yet.
What's particularly interesting here is how Trump, the deregulation champion, is essentially endorsing the continued government role in mortgage markets. This reflects political reality—Americans love their 30-year fixed mortgages, and no politician wants to be the one who took them away.
If implemented, the plan would represent one of the largest privatizations in American history. Fannie and Freddie together hold or guarantee about $8 trillion in mortgage debt. For context, that's roughly twice the size of the entire U.S. federal budget.
The thing is, for all the drama, we're basically talking about returning to a version of the pre-2008 system, but hopefully with better capitalization requirements and more explicit pricing of the government support. Will that be enough to prevent another bailout when the next housing crisis hits? Man, I don't know.
As always in finance, the devil's in the details—and those details would need to be hammered out between Treasury officials, the Federal Housing Finance Agency, and Congress. That's assuming Trump wins in November and follows through on this proposal, neither of which is guaranteed.
For now, this remains a Truth Social post, not policy. But for those of us who've been following the Fannie and Freddie saga for years, it's a fascinating new plot twist in America's longest-running financial reality show.
