CNN
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During his second term, President-elect Donald Trump is widely expected to privatize Fannie Mae and Freddie Mac, the mortgage giants that guarantee 70% of America’s mortgages.

Amid a housing market marked by stubbornly high mortgage rates, a long-standing supply shortage and soaring home prices, some economists warn that privatizing these two mortgage behemoths, worth a combined $146 billion as of the third quarter of this year, would be overly complicated and could make it more expensive for many Americans to borrow money to purchase a home.

Trump’s first administration tried — and failed — to wrest Fannie and Freddie from the government conservatorship that’s been in place since the 2008 financial crisis. The government’s stake in the two mortgage giants could be valued at billions of dollars, meaning a spinoff would potentially net a big payday for the government and private investors in the two companies, said Ted Tozer, who led Ginnie Mae, a separate government-sponsored mortgage company, during the Obama administration.

“Bringing them back to private companies isn’t outlandish,” Tozer said. “The question is, is it worth the pain of the transition?”

In a 2016 paper, Mark Zandi, chief economist at Moody’s Analytics, estimated that full privatization of Fannie and Freddie would cost the typical American taking out a new mortgage $1,200 annually. Taking into account home prices and interest rates in 2024, that added cost today would be between $1,800 and $2,800 per year for a typical mortgage holder, Zandi told CNN after updating his original paper’s calculations. Zandi said the added cost would be even greater for Americans with lower incomes or credit scores.

The risk is that privatization efforts could spook investors without assurances that the government would bail out Fannie and Freddie in a crisis like in 2008. Investors who buy up the loans would likely demand higher rates for lower-income borrowers to compensate.

“If you’re a lower-quality borrower, you’re more risky and therefore will be charged more,” Zandi said. “Today, you don’t have to pay that because you’re backstopped by the government.”

Karoline Leavitt, a spokesperson for the Trump-Vance transition, said, “No policy should be deemed official unless it comes directly from President Trump,” in response to questions about a potential Trump administration plan to privatize Fannie and Freddie and its possible effect on mortgage rates.

Many Americans already have whiplash after recent swings in mortgage rates: After the average 30-year fixed mortgage rate peaked at nearly 8% last fall, rates fell steadily ahead of the Federal Reserve’s first interest rate cut in September. That trend has since reversed, and mortgage rates have climbed back up to nearly 7% as investors bet that the Fed will cut rates fewer times than initially expected due to recent strong economic data.

Last week, Trump doubled down on his promise of massive tariff hikes on goods from Mexico, Canada and China starting the first day of his administration. Most mainstream economists believe those tariffs will stoke inflation, meaning that borrowing rates will likely stay higher for even longer.

Fannie and Freddie don’t directly issue mortgages to borrowers. Their aim is to buy mortgages from lenders and repackage them for investors. This helps enable a reliable flow of money to mortgage lenders, allowing them to offer more affordable rates to would-be homebuyers.

During the housing meltdown of 2008, the two companies were brought under government control in an effort to stabilize the housing market. Ever since, they have been overseen by the Federal Housing Finance Agency.

The two companies’ ability to effectively operate has propped up the 30-year fixed mortgage, the most popular home loan type due to its relatively lower monthly payments that stay the same over a 30-year period. Without the government backing of Fannie and Freddie, bond traders might deem their mortgage-backed securities riskier investments.

“As a politician, the last thing you’d want to do is cause problems when the problems don’t exist,” Tozer said. “To have a hiccup occur and all of a sudden credit becomes more costly or people can’t get a mortgage at a reasonable rate, I don’t think any politician wants to face those unintended consequences.”

The conservatorship was never meant to be permanent, said Susan Wachter, professor of real estate and finance at the Wharton School of the University of Pennsylvania.

“The law says they are eventually to be privatized,” she said. “But the stakes are very, very high as to how this is carried out.”

If the government were to charge a fee to Fannie and Freddie for the guarantee of a bailout in another crisis, some of the mortgage market swings from going private could be mitigated, Wachter said.

“I do believe they can be privatized with a government commitment fee,” she said. An additional fee could be passed to the consumer, raising the cost of mortgages, though that depends on how the privatization is carried out, Wachter said.

Some analysts advocate for full privatization, meaning the government would not provide assurances to backstop the two mortgage companies. Norbert Michel, a director at the libertarian think tank the CATO Institute, has argued such government backing stifles competition.

“In a private market, as opposed to a government-controlled market, you’re going to have more widespread opportunities for everybody, whether it’s businesses coming in or people on the consumer side — and that’s what you want,” he said.

Hopes of Fannie and Freddie privatization

Fannie Mae’s and Freddie Mac’s stocks both surged after Trump’s electoral victory, indicating that investors believe Trump will renew his efforts to privatize the companies.

“My Administration would have sold the government’s common stock in these companies at a huge profit and fully privatized the companies,” Trump wrote in a 2021 letter after he left office to Republican Sen. Rand Paul. “My Administration was denied the time it needed to fix this problem.”

Some of Trump’s supporters, including Bill Ackman, the billionaire hedge fund manager at Pershing Square Holdings, are invested in the two companies and stand to potentially make millions of dollars if they are spun off.

“The U.S. Presidential election in November 2024 may present the opportunity for a change in the status quo,” Pershing Square’s 2023 annual investor letter said. “The Trump administration had begun the process of releasing Fannie and Freddie from conservatorship, a process which would likely be completed in a future Trump administration.”

But the way the Trump administration may usher in a new era of housing market finance, whether it be privatizing Fannie and Freddie with the promise of government backing or a separate plan entirely, will make all the difference.

“It’s going to be the big challenge walking this fine line because it’s been more than 15 years of this conservatorship,” Tozer said.