Donald Trump is eyeing up what might become “the biggest deal in history” and the stakes could not be higher.
It could feasibly bring in hundreds of billions of dollars for the public purse and boost homeownership. Or it could send mortgage rates soaring.
The deal is the fate of Freddie Mac and Fannie Mae, the two mortgage giants that together back around $7 trillion (£5.2 trillion) of America’s $12 trillion mortgage market – a sum roughly double the size of the UK economy.
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The two government-sponsored enterprises (GSEs) nearly went under during the financial crisis and were bailed out by the US Treasury in 2008.
For the last 17 years, they have been in government conservatorship, meaning they are governed by the Federal Housing Finance Agency (FHFA), with an explicit government guarantee behind their loans.
Now, the president wants to start cashing out.
“I am giving very serious consideration to taking Fannie Mae and Freddie Mac public,” Trump wrote on Truth Social on May 21.
“Fannie Mae and Freddie Mac are doing very well, throwing off a lot of CASH, and the timing would seem to be right. Stay tuned!”
The two GSEs have a combined net worth of almost $161bn. Selling a portion of these shares could rival the $25.6bn Saudi Aramco initial public offering (IPO) as the biggest listing in history.
But there are big potential problems.
It is not clear what the trade-off will be between the Treasury’s stake in the GSEs and those of private investors, who include several of Trump’s billionaire backers. The deal raises questions about threats to financial stability, and there is a risk it could drive mortgage rates higher.
In early June, a group of 14 Democrat senators led by Elizabeth Warren wrote to FHFA director William Pulte warning the result could be “disastrous”.
Fannie and Freddie are enormous. Between them, they support about 70pc of the US mortgage market. “Back in 2007, they were a sizeable chunk of the market, now they are almost its entirety,” says Jim Parrott, of the Urban Institute.
The GSEs function by buying up mortgage loans from banks. They pool the mortgages into trusts and slice them up to issue mortgage-backed securities (MBS), an investment vehicle similar to a bond. These are then sold to insurers and pension funds.
Fannie and Freddie earn a fee by guaranteeing the debt. This is one of the bedrocks of the American financial system.
There are many good reasons to end conservatorship, which was supposed to be a temporary crisis measure.
Aaron Klein, senior fellow on financial regulation at the Brookings Institution, argues that opening the GSEs up to private capital would free them from the government’s risk-averse lending terms and open up mortgage borrowing for first-time buyers.
Messing it up, however, would risk triggering contagion across the financial sector.
One of the most important questions is what happens to the government’s guarantee – worth some $250bn – if the GSEs leave conservatorship.
Analysts have warned losing the government guarantee could add a whole percentage point to mortgage rates. This would take the average rate on a 30-year fix to more than 7.7pc – in line with the 23-year high that was hit in 2023.
Mike Calhoun, the president of the Centre for Responsible Lending, says: “It is critical that this [exit] be done at the right time and this is not that time.”
The administration is wary of the risks. Scott Bessent, the treasury secretary, said in February that the “most important metric” would be the impact on mortgage rates.
In another post on May 27, Trump said: “I want to be clear, the US Government will keep its implicit GUARANTEES, and I will stay strong in my position on overseeing them as President.”
An “implied” guarantee, however, is not the same as the explicit guarantee that is currently in place.
“The implicit guarantee isn’t enough,” says one investment banker. “The market has become addicted to having that backstop in place and to remove it would create all sorts of volatility.”
Without an explicit government guarantee, there will be a credit risk attached to Freddie and Fannie’s mortgage-backed securities that did not exist before, says Libby Cantrill, head of public policy at Pimco, one of the largest participants in the agency MBS market.
This will limit who can buy the mortgage-backed securities. And if there are fewer investors, they will demand higher rates, meaning higher costs for homebuyers.
Analysts argue that the explicit guarantee could remain in place without much risk to the taxpayer. Freddie and Fannie’s loan books are in good shape. Goldman Sachs analysts say the likelihood of needing to draw on the guarantee is “remote”.
But instituting an explicit guarantee would require getting Congress on side to pass an act to make it happen.
One route the president is apparently exploring is actually not ending the conservatorship at all.
“We’re studying actually potentially keeping it in conservatorship and taking it public,” William Pulte, the FHFA director, told CNBC.
This might solve the question of the guarantee, but it would also mean no scope for broadening mortgage lending.
Another big question for the taxpayer is how the Treasury decides to treat Fannie and Freddie’s other shareholders.
Trump’s initial Truth Social post on May 21 sent shares of Freddie Mac and Fannie Mae – which are publicly available as over-the-counter stocks – soaring by 42pc and 50.6pc respectively.
Markets were betting that releasing the GSEs from conservatorship would release huge built-up profits for private shareholders, which include Trump’s billionaire hedge fund backer Bill Ackman, who has been a loud advocate of the plans.
“Trump likes big deals and this would be the biggest deal in history. I am confident he will get it done,” Ackman said at the end of last year.
Another billionaire Trump ally, John Paulson, was also an investor in Fannie and Freddie.
But a shareholder win would mean trade-offs.
In return for its crisis cash injection, the Treasury got senior preferred shares in Fannie and Freddie – a claim that is now worth $348bn.
It also effectively owns 79.9pc of the common stock. In other words, Fannie and Freddie owe the government more than double their net worth of $161bn, and the Treasury’s claims come first over any other private shareholder’s.
There are therefore expectations that the Treasury would write down some of its claims so that the deal works better in the favour of the private shareholders, the president’s friends.
“If done right, it could be a win for taxpayers and it could really help millions of Americans access mortgages,” says Klein.
“If done wrong, it could be a massive looting. It could take hundreds of billions of dollars from taxpayers and reward hedge funds and speculators.”
Ultimately, nobody knows what the president will do. Parrott says: “It’s very, very unclear where we’re all headed.”
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