Fannie Mae IPO Could Have Serious Side Effects on Mortgage Rates

0:00Two-thirds of every single mortgage in the United States flow through just three massive government entities. Fannie Mae, Ginnie Mae, and Freddie Mac. These companies operate behind the scenes. You may not often think of them, but they are a massive part of the infrastructure that makes the housing market actually run. And the Trump administration is proposing changes that could radically shape how they work. He's talking about taking Fannie Mae and Freddie Mac public. And this would not be a normal IPO. No, changing the ownership structure and the government's role in these companies wouldn't just make them subject to public market scrutiny, it could also impact loan availability, housing policy, and yes, even mortgage rates and probably not in the way you'd like them to go.

0:57So today on the show, we're digging into the issue of taking Fannie Mae and Freddie Mac private. We'll start by talking about what these companies are, why they have such a unique structure as a public-private entity, how they wound up in government hands during the great financial crisis, why there's talk of taking them public, and how an IPO would impact the housing market and real estate investors alike. This is On The Market. Let's get to it.

1:30Hey, everyone. Welcome to On The Market. I'm Dave Meyer. Today, we are talking about an issue that has been making news a lot during President Trump's second term, and that is taking mortgage giants Fannie Mae and Freddie Mac public. When I say public, that just means listing them on the stock exchange through an IPO, an initial public offering. So basically listing them on the stock exchange. And there is a big debate raging in the industry about whether this is a good idea, What would happen if it actually goes public? And of course, investors, homeowners are all wondering, what would this mean for them if this actually happens?

2:12So today on the show, we're digging into it. We're going to talk all about what these companies are in the first place because they play a very unique and very important role in the housing market. We'll also talk about the government's role in these companies in this very weird, unique structure that they have. We'll talk about the prospects of an IPO, the pros and cons, and what you should be watching as this all unfolds. Let's get to it. We're going to start with just the basics here. What are Fannie Mae and Freddie Mac? Fannie Mae, it's not actually, it's just kind of a nickname for the company.

2:44It's the Federal National Mortgage Association. It was created way back during the depression in 1938. The whole goal of it was to create cheaper housing and to get more loans flowing. Freddie Mac is a very similar company. It was created in 1970. It stands for the Federal Home Loan Mortgage Corporation. It was basically created in 1970 to create some competition for Fannie Mae. Now, you probably have heard of these companies, but they are not traditional banks. They don't actually lend to consumers. What they do is more on the back end. They actually go out and buy mortgages from banks and lenders.

3:27They bundle them together into mortgage-backed securities, also known as MBS, and sell those to investors worldwide. So what does that mean? Let's just break this down. If you go out and get a loan from a bank, whether that's a local bank, credit union, even sometimes if it's from Chase or Wells Fargo, some of these big companies, Those banks don't hold on to the mortgages that they originate. If they did, that would limit how many loans that they could create, right? They only have a certain amount of deposits. And so at a certain point, they would just give away all the money that they had, and then they couldn't originate any more mortgages.

4:07That is not good for their business model. And the government has taken the position that that is also not good for the housing market because it would limit transactions and it would limit availability to the housing market. And so what happens most of the time, this is more common than not, is that that bank, let's just say it's Chase, let's say it's Rocket Mortgage, right? They go out and once they've originated that loan, they collect the origination fees so they make money, but then they go sell that loan to Fannie Mae and Freddie Mac. And so that goes off the bank's books and then they get money back that they can go out and lend again.

4:44Now, what Fannie Mae and Freddie Mac do once they've purchased this loan is they bundle them together. Let's just call it a group of 100 mortgages. And then they'll go out and sell that mortgage to a pension fund or to a sovereign wealth fund or any sort of investor who wants to service that mortgage, right? Because there are investors out there who want to collect the 5%, 6%, 7 % interest that they can get off of a mortgage. It's sort of another way that you can get fixed income different than bonds. It's a little bit riskier than bonds, but this is investors do this, right? They go out and buy mortgages and Fannie Mae are an enormous part of that.

5:24They create so much of the liquidity in the mortgage market that allows credit to flow. And because, and we'll talk about this more in a little bit, there is an implicit guarantee that the government will backstop these mortgages, it lowers mortgage rates. By and large, people who study these things believe that the existence of Fannie Mae and Freddie Mac lower mortgage rates. So big picture here, they are super important. Now, they are not private companies in the traditional way that Walmart or Amazon are. They are actually called a government-sponsored enterprise. I'm going to call them GSEs.

6:06That's kind of what they're known as. And they're sort of this hybrid kinds of organization because they are actually chartered by Congress. They have a public mission. So that's the public side. But they operate, historically at least, as a shareholder-owned company. That is the private side. So it's kind of weird, right? It's kind of both a government entity and a private entity. Now, the idea, at least behind this structure, is that it should be operated by the private markets because it's more efficient and we have a capitalist market-based economy. But the government side, the fact that the government has this quote-unquote implied government guarantee allows people like you and me who borrow money in mortgages that are sold through Fannie Mae and Freddie Mac, that allows us to borrow at a cheaper rate.

6:57It is also, IPO in my opinion basically the only reason that a 30-year fixed rate mortgage exists at all in the United States and anywhere in the world because a 30-year fixed is basically an American loan that doesn't really exist anywhere else. And I want to be clear because this will come up later when we talk about the IPO but the idea that the government guarantees these mortgages and their performance is not actually real. It's not explicit. It is not written down. It is not legal. It is what they call an implicit guarantee that people believe that the government will back up these mortgages.

7:37And as we know, in 2008, they did step in in a big way to shore up the mortgage market. But just remember, that is not a guarantee. It is an implicit guarantee, not the same thing. So that's what they are. And I think one thing everyone should know here is that this is totally unique to the United States. There is no other major economy in the world, at least that I know of, that structures its housing finance this way. And people will have different opinions on whether that is good or bad. But the whole reason our housing market is basically built upon the back of a 30-year fixed rate mortgage that's prepayable, which is awesome, that is a uniquely American thing.

8:23The rates that we get on those 30-year fix are sort of artificially low or can be that low because of Fannie Mae and Freddie Mac. And to just further emphasize this here, because like I said, the whole Howley market sort of built on the back of these entities. Let me just demonstrate that to you in a couple of numbers here. At the end of 2025, according to a Columbia Business School analysis, the total U.S. residential mortgage market was about$15 trillion. Fannie Mae and Freddie Mac combined were$6.8 trillion of that. That is just under half of the total mortgage market. Now, we're not talking about Ginnie Mae here, too.

9:06That is another government-backed entity. Ginnie Mae is a little bit different. It's a similar mission, but they do FHA and VA loans. That's about 20 % of the market. So actually, if you look at those three entities combined, Ginnie Mae, Fannie Mae, Freddie Mac, two thirds of every mortgage originated in the housing market goes through these entities. So when I say they are important, they are incredibly important. When you compare that to banks that just hold on to those loans, remember I say most of them go often sell them. When they keep them, that is often called a portfolio loan. Portfolio loans are only about 22 % of the market.

9:46So about a third of the size of the government-backed mortgages that we are all using. So they're huge in terms of volume, but they do more because the only way that Fannie Mae and Freddie Mac are able to bundle and sell these mortgages as efficiently as they do is by standardizing the mortgages. If you've applied for a mortgage, this is why you have to check all those boxes, why they have all of these weird rules, why there is so much paperwork and seemingly nonsensical rules. It's so that every mortgage, once they reach Fannie Mae and Freddie Mac to be resold, looks relatively similar. And so that when investors go and buy those mortgages, they know roughly what they're getting.

10:31Because when they go and bundle these mortgages and sell them off, these investors, a pension fund is not going to go look through a thousand different mortgages and underwrite them. They are trusting Fannie Mae and Freddie Mac to group them together appropriately. And in order to do that, they have some rigid rules. So that being said, Fannie Mae and Freddie Mac, they set the rules around the majority of mortgages. They set conforming loan limits. They set debt to income ratios. They set down payment standards. These are hugely important elements of who gets loans and how easily the housing market is achievable or affordable or accessible to the average American.

11:15So they're also important in that way. The other thing I should mention that they've done in the past that is also getting tired of saying this hugely important is that they are counter cyclical in the past or in other countries that don't have things like this. When the economy turns south and private capital flees the market, right, banks don't want to lend as much or pension funds don't really want to buy mortgages as much as they might. GSEs keep buying, right? They are government backed entities with a public mission. And so they continue to help the plumbing and the infrastructure of the housing market work, even when private capital is not as interested.

12:01Super important backstop for the housing market. So regardless of what you think about privatization, and we're going to get to that in just a minute, these companies matter a lot to a housing market. This is just an indisputable fact. So if they're doing their job, what's the issue? Why is there talk of taking these companies public? We'll get to that right after this break. Stick with us. Some listeners may wonder why their insurance quote only took 30 seconds. Some listeners may wonder why their insurance quote took 30 seconds. A better question is, how long will that policy actually hold up when you need it?

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15:24Welcome back to On the Market. I'm Dave Meyer. We're here talking about how government-sponsored entities, GSEs like Fannie Mae and Freddie Mac, how fundamental they are to the housing market? And why is there talk of IPO-ing these companies? Why now are we talking about listing these on the stock market? To understand that issue, we briefly have to talk about their history. So I mentioned earlier, Fannie Mae started in 1938. In 1968, it actually privatized. It became a public company. So this is super important, right? It actually has been a public company in the past, starting in 1968. Then Freddie came around in 1970, as I mentioned, but it wasn't really until the 1990s and 2000s until they really just became these massive financial institutions, huge, huge companies, because they have a big advantage in the market.

16:22They could offer lower rates. They are very competitive compared to other lenders that don't use conforming mortgages, right? And so in the 90s and 2000s, they got huge. But I'm guessing you can see where this goes. In the mid 2000s, they really started piling into buying, selling subprime mortgages, trying to get bigger and to compete. And partially, I will say, under political pressure to expand homeownership. And we all know what happened from there, right? The subprime mortgages they bought and guaranteed, they go bad. They were basically giving out loans to people who couldn't pay, and those started to go belly up.

17:00And the whole institution was essentially falling apart, becoming insolvent. So in September 2008, 40 years after Fannie Mae went private for the first time, the FHFA, a government entity, the Federal Housing Financing Authority, placed both Fannie Mae and Freddie Mac, both of these entities, into conservatorship. This is basically what has been called or at the time was billed as a temporary federal takeover. It was never meant to last forever, but it was basically to save the companies. The U.S. Treasury at the time injected$187 billion to keep these companies solvent. It was a bailout, right?

17:41They bailed them out to the tune of$187 billion. dollars. In exchange for that, though, the Treasury got some shares in the company, about 80 % of the common stock in the company. So the vast majority of all the stock the U.S. Treasury now owned. Basically, government took over these companies, saved them, got some stock in exchange. And in 2012, last thing you need to know is they did something called a net worth sweep. Doesn't really matter what it means, but it's just kind of the Treasury started taking all the profits for itself, right, as part of getting paid back for the bailout, as being the largest shareholder of these companies.

18:17It was taking all of their profits. And that has become, since 2012, since they started doing that, a big legal and political flashpoint for shareholders. So that's going to come up in this IPO conversation. So you should just know that happened. So basically, that is where things stand today. The two companies, Fannie Mae, Freddie Mac, still in conservatorship, 17 years and counting, right? They have repaid the treasury well in excess of the original bailout. So they've repaid it more than that 187 billion. And I guess what's been going on in the background, because to you and me, to most homeowners, like nothing's really changed.

18:57It's been fine. Like, I don't know. I've been, I've been investing for basically all that time. And I haven't really thought very much about whether Fannie Mae and Freddie Mac were private or in conservative ship. It's just been operating fine. But common shareholders, people who had invested in these companies prior to 2008, have been trying for years to regain some of the money that they claim that they are owed because it shouldn't be a government entity. So that's basically what's been happening for the last 17 years. But recently, there has been renewed conversation around privatization. Again, when I say privatization, same thing as an IPO, same thing as going public, just listing it on the stock market.

19:44President Trump did push for this sort of lightly in his first term. It didn't happen. But in the second term, he has talked about it a lot more. Back in August of 2025, Trump administration actually met with like six of the largest banks to lay the groundwork for an IPO. And their idea, what they floated out there was to sell up to$50 billion in preferred shares. We've seen support within the administration, the FHFA director, Bill Pulte, has been a very vocal supporter. And so it looked like this was happening. And actually, as of late 2025, analysts were projecting that by, you know, middle of 2026, around now, an IPO would happen.

20:26Now, that momentum did slow, has been slow, as the administration seems to have turned its attention to the Middle East. But there is still a good chance this happens, or at least a push to make it happen. If you look at MBS investors, like people who follow this stuff carefully, you know, everyone bets on everything now. You can look at public markets for anything. It's about a 50-50 shot. About 50 % of people believe the privatization will happen by 2028. But why? Like, why now? if it's been fine for 17 years, like what's the case to actually do this? The reasons proponents are saying this should actually happen are as follows.

21:06First, reduce taxpayer exposure to the seven, eight trillion dollars in mortgage guarantees that Fannie Mae and Freddie Mac have. Taxpayers are ostensibly on the hook for that because the government is so involved in these companies. So that's one. The other is to generate substantial profit for the government from selling the treasury warrants. They were saying up to$30 billion, but analysts say that the government could earn up to$250 billion by selling this stock. Proponents also say it should be a private company, like let private capital and risk pricing do its job and get the government out of what these people say should be a private entity.

21:53And the last thing we should mention, because this is a big thing, is pressure from the common shareholders who own stock in this company have been waiting since 2008 to get some liquidity out of this company. Personally, I actually think this is probably the biggest one. They haven't been able to monetize their investments and they've been vocal about wanting the companies to go private again and to end the conservatorship. But they have been saying this for a long time. So the reason why now specifically people are talking about it is because there's a Republican trifecta in Washington. Republicans have the House.

22:28Republicans have the Senate. Republican has the presidency. So it's politically just easier now than under split government. The other reasons are the housing market, despite being really slow, it is sort of stabilized post pandemic. There's not really much evidence that a crash is imminent. So in a stable housing market, it'd be easier to do this. And it also just goes along with a lot of President Trump's economic agenda, which is to deregulate. Right. And this would be deregulation, getting the government out of a major part of the economy while returning capital to taxpayers. So those are the reasons why it's being talked about now.

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25:14Welcome back to On the Market. I'm Dave Meyer. Today, we're talking about the GSEs, Fannie Mae, Freddie Mac, and going public. Before, we talked about what proponents say, right? And I'll just summarize again the benefits to the companies going public. And then I'll talk about some of the cons. So number one, removes taxpayer backstop. So they're saying, you know, government's guaranteeing these mortgages. So that would go away if it went public. It could attract more private capital into the housing market if rates went up and it was more attractive. Forces some clear pricing, right? If you are letting the proper amount of risk price mortgages, like that might have some benefits.

25:53It ends this weird arrangement that the government has. And there could be money up to$250 billion for the U.S. Treasury. So those are some of the reasons and they're real reasons to do this. Now, there are some cons to this. So first and foremost, let's talk about that implicit guarantee, because the argument that a lot of people make is that if the companies go private, taxpayers are no longer on the hook for guaranteeing these mortgages. And I'm just going to, I'll be honest, I'm sorry. I do not buy that. I do not buy that at all because the companies were private in 2008 and the government bailed them out.

26:37And even if they go private, every investor who invests in these companies is going to expect the government to bail out Fannie Mae and Freddie Mac if they do something that screws up again, right? Even if they go and take risky loans like they did from 2000 to 2006 or whatever, the government bailed them out because they're quote unquote too big to fail. And so that part of the argument, I just don't really buy, right? I just don't really think that makes sense because I think the government is going to still at a minimum implicitly guarantee, remember the difference, implicitly guarantee these mortgages.